1. The application for a review of the First Respondent's decision on liability is dismissed.

2. The decision of the First Respondent dated 2 December 2002 and confirmed on 20 December 2002 and 7 February 2003, in relation to liability is confirmed.

3. The application for review of the First Respondent's decision on quantum dated 23 June 2004 is referred to an Administrative Mention on 21 January 2005.

4. Costs reserved - liberty to apply. I direct the principal registrar to list any application for costs before Deputy President Aird.

1. This is an appeal by the builder against the decision of the insurer to accept the owners' claim in relation to the defective flooring in their apartment. The builder was represented by Mr Stuckey of Counsel, the insurer by Mr Oliver of Counsel and Mr Papaioannou, one of the owners, appeared in person on behalf of the owners.

2. The owners purchased the apartment, which is a three storey dwelling with polished floorboards on the first floor only, from the developer N3K Developments Pty Ltd by contract of sale dated 18 September 2001. They moved in on 1 January 2002. Mr Papaioannou gave evidence that the owners inspected the apartment a number of times prior to settlement during which time they noticed some gapping between the floorboards on the first floor of the apartment, which was not significant. After moving in he became more concerned with the degree of gapping and splitting of floorboards and contacted the builder's representative, Mr D'Azzena who was on site completing some outstanding items in the apartment block. Mr D'Azzena arranged for Mr Gombac, director of the builder ('the builder') to inspect the flooring. Mr Papaioannou said the builder told him that the movement was normal in a timber floor which could be expected to expand during the winter months so that the gaps would close up.

3. This did not occur, and in fact, Mr Papaioannou said that the gapping and splitting became more pronounced. On 20 August 2002 the owners lodged a claim with the insurer. This was initially rejected on 13 November 2002 on the advice of the inspector engaged by the insurer - Mr Stokes, but was subsequently accepted on 2 December 2002 after an inspection by representatives of the insurer. The builder requested the insurer to reconsider its decision and it confirmed its decision on 20 December 2002 and 7 February 2003.

4. All parties agree that the floor is defective and should be replaced. However, the dispute between the parties is whether the builder is responsible for its condition.

5. Mr Gombac, Mr D'Azzena, Mr Bouissin and Mr Jenkins gave evidence on behalf of the builder, Mr Papaioannou gave evidence on behalf of the insurer and the owners, and Ms Kirby of the developer and Mr Neil, the architect for the project, gave evidence on behalf of the insurer. Expert evidence was given on behalf of the builder by Mr Murley, and on behalf of the insurer by Mr Hay. Mr Stokes who carried out the original inspection on behalf of the insurer and Mr Stavers of the selling agents were subpoenaed by the builder to give evidence.

6. I accept that the floorboards (which are mountain ash, a eucalypt) were delivered to site on or about 12 April 2001. They were laid out in stacks of 3, 4 or 5 floorboards - the exact number in each stack is unclear - separated by spacers for the purpose of acclimatisation until they were laid on 29 May 2001. The floor was laid over particleboard which had been laid by the builder (with the approval of the architect) to provide a work platform during the construction period. The timber floor was sanded and sealed on or about 19 July 2001 - some six weeks later. The specifications provided for the floor to be sealed with two coats of Wattyl proclear gloss or equivalent, followed by a third coat of Wattyl proclear satin or equivalent. The architect approved the substitution of "Timber Care" products instead of Wattyl as requested by the floor sander who apparently advised that "Timber Care" was a better product.

7. The builder denies liability for the gapping and splitting of the floorboards. It contends that there has been excessive shrinkage in the floorboards which was caused by the developer's failure to install window furnishings and to properly ventilate the apartment during the period from 1 August 2001 and 1 January 2002 which created a hot-house effect. The builder seeks to rely on two letters to the architects for the project - on 25 September 2001 and 23 January 2002. The second paragraph of the letter of 25 September 2001 provides:

We understand that the apartments are to be marketed for sale and would like you to inform the clients that during this time, when the apartments will be unoccupied, they will need to be maintained, with particular care for the timber floors. Window furnishings will need to be installed to protect the timber floors from the weather elements and regular ventilation of the apartments will assist in ensuring that the timber floors are well maintained.

However, this letter does not contain any warning as to the likely consequences of any failure to install window furnishings or ensure regular ventilation of the apartments. It was written approximately seven weeks after practical completion of Apartment 1 - there is no evidence that any warning were given during the construction phase or at the time of practical completion.

8. The second last paragraph of the letter of 23 January 2002 to the architects, which was apparently written because of Mr D'Azzena's concerns about the heat in the other apartments, particularly those facing West, when he was there on 21 January 2002, provides:

In addition to our comments above, we are writing to bring the following to your attention. Upon our attendance on site, Monday the 21st day of January 2002, our trades person Frank D'Azzena expressed his concerns at the heat contained within the vacant apartments resultant from the extremely warm conditions over previous weeks. Due to the heat, shrinkage had occurred in the timber stringers, and the timber floor boards, particularly those closest to the windows with direct sunlight, have experienced excessive shrinkage.

However, this letter was written some three weeks after the owners moved in and only refers to the apartments vacant as at 21 January 2002 and surprisingly there is no reference to the earlier letter of 25 September 2001. It alleges that the floorboards have shrunk significantly and whilst that may be the case in the other apartments it is of little assistance in determining the cause of the problems with the floor in Apartment 1. I did not hear any evidence in relation to the problems with the timber floors in other apartments in this development, nor was I invited to inspect any of the other apartments when we attended the property for a view on the morning of the third day of the hearing. I am therefore unable to comment upon them and have not taken them into account in making this decision.

9. I found the expert evidence to be generally unsatisfactory. Whilst purporting to have prepared their reports in accordance with VCAT Practice Note 2 it was apparent that neither expert had any real understanding or appreciation of his obligations under the Practice Note. In particular, neither expert brought their raw data with them to the hearing. This was a particular concern in relation to Mr Murley's evidence where his viva voce evidence was significantly more expansive than his written report. It seemed that much of his report was based on technical literature that had not been referred to as reference documents, and which was not available at the hearing. It is difficult to accept his interpretation of that literature without having an opportunity to consider it. His attitude in relation to the Australian Standard, which he clearly does not agree with, was not helpful and did nothing to persuade me I should rely on his evidence. He clearly relied on information provided to him by the builder in reaching the unsupported conclusions as set out in the following two paragraphs of his report:

"The property being shut by the Developer for such a long time before selling can also create abnormal humid conditions.

Full length windows, large glass areas, such as there is, which admit direct sunlight can create sunroom conditions with high temperatures and low moisture conditions causing flooring to shrink. Such conditions were in force during the developer control."

10. Not only are the conclusions unsupported by any technical literature and based on information provided by the builder as to the prevailing conditions (as conceded by Mr Murley) the two paragraphs are seemingly inconsistent: the first referring to abnormal humid conditions and the second to low moisture conditions. Further, reference is not made in his report as to the moisture measurements taken or the moisture meter used, which are clearly important as illustrated by the extensive evidence given about them at the hearing. In any event, I am not persuaded that his readings are reliable. Mr Murley gave evidence that his meter had been calibrated for eucalyptus but that it does not make allowances for individual species as required by AS 1684.4-1999, which standard Mr Murley said he does not agree with. I accept that in such circumstances his meter is likely to understate the moisture content of the Mountain Ash flooring by approximately 1.5 percentage points.

11. Mr Hay's evidence was similarly unreliable. On his own admission his first report was based on a misunderstanding as to the original measurements of the face boards. Although he said he returned to site to carry out additional measurements he did not have those measurements with him and, in fact, after the weekend adjournment Mr Oliver confirmed that Mr Hay would not be recalled because, despite his evidence to the contrary, he had not carried out any additional measurements on the second inspection. Mr Stuckey made his own calculations of the moisture content based on the measurements contained in Mr Hay's second report which indicated that those calculations were flawed. However, I did find Mr Hay's evidence in relation to the possible implications of acclimatisation of the floorboards in the manner adopted by the builder - that there would be differential drying out of the ends and the middle of the boards - persuasive, particularly given the period for which they were left before laying.

12. I take this opportunity to remind the experts that their primary duties as set out in Practice Note 2, are to the Tribunal, not to their clients.

13. Ms Kirby was unable to give evidence of times and dates on which the apartment was open and the period for which it was open on each occasion. However, I accept it was open regularly, at least weekly after the apartment was sold, to enable watering of the plants. Although Mr Stavers gave evidence that the apartment was opened up for 15-30 minutes prior to any 'open for inspection' because it otherwise tended to be uncomfortably warm when wearing a suit, both Mr Papaioannou and Ms Kirby disputed this. Whilst I have some reservations about Ms Kirby's evidence (because of her involvement with the developer) I have no reason to disbelieve Mr Papaioannou's evidence - he is the only witness who has spent long periods in the apartment during different weather conditions. He agreed that the top floor of the apartment does become very warm but said heat is not a problem on the first floor.

14. I was referred to the 1999 Guides to Standards and Tolerances issued by the Building Control Commission (as it then was). Clause 10.1 is concerned with gaps in exposed timber flooring which provides that gapping in areas affected by direct sunlight is not considered a defect, and further:

Where the manufacturer can establish that the flooring system was laid in accordance with the manufacturer's instructions, the builder shall not be liable for gaps considered as defects where the builder has made the owners aware, as acknowledged by them in writing, that the flooring system installed could suffer significant shrinkage leading to visually obvious movement resulting in gaps well in excess of the normally acceptable

15. Although these are clearly intended as Guidelines only they do provide some assistance in determining the liability of the builder. Notwithstanding that a number of the witnesses called on behalf of both the builder and the insurers indicated that shrinkage is a well known phenomenon when buildings are poorly ventilated and window furnishings are not installed where there are large expanses of glass, there is no mention in the Guidelines of gapping not being a defect where it occurs in areas subject to variations in temperature and climactic conditions alone. Further, if the builder had concerns about the suitability of timber flooring in what they regard as being unprotected conditions this should have been brought to the attention of the developer before it was laid, and the developer asked to sign an acknowledgement as contemplated by the Guidelines. This did not occur, and, in fact, it was not until some months after the floor was laid, that any steps were apparently taken to warn the developer. Therefore under the Guidelines the flooring is a defect for which the builder is liable.

16. It was apparent at the view conducted on the third morning of the hearing that there is extensive shrinkage, gapping and splitting over the entire floor area. Evidence of edge bonding is clearly apparent. Had the gaps only been in the areas affected by direct sunlight I would have had no hesitation in finding the flooring was not defective. However, some of the worst affected areas are in the middle of the room and in the small areas near the fridge in the kitchen and between the powder room and stairs to the third floor.

17. The major difficulty with the position adopted by the builder, is the failure to explain the significant gapping and splitting after the owners moved in. Although it may well be that some of the shrinkage which occurred during the period August to January was caused by the apartment being closed up for long periods - although there was no technical data/literature produced to support this - I accept the condition of the floor has deteriorated further since they moved in. This was confirmed by Mr D'Azzena who, on looking at the photographs taken by Mr Papaioannou, said the floor was in nowhere near as poor condition when he was last there in February 2002 when he said he thought the overall appearance and condition of the floor was acceptable and that the gapping was not a big issue. He also said that at that time he did not consider any rectification works were necessary. Mr Gombac agreed that he had not considered this to be a major problem in February 2002 because he expected the flooring would expand and the gaps close up during the winter months.

18. I am therefore satisfied on the balance of probabilities that the defects in this floor are due to the poor workmanship of the builder, particularly in the absence of any warning by the builder to or acknowledgement by the developer as contemplated by clause 10.1 of the Guidelines to Standards and Tolerances. On the evidence before me it is difficult to determine the exact measurements of the boards or their moisture content when they were laid. However, irrespective of what the moisture content may have been I am satisfied on the evidence before me that the primary cause of the gapping and splitting is the edge bonding - but for the edge bonding it may well have been that there would have been small gaps between each of the boards, and no splitting and that this would have been reasonable in circumstances where timber is a natural product that expands and contracts with the weather conditions. I do not accept that edge bonding to the extent that is occurred here is unavoidable and inevitable if timber is properly acclimatised and not left unsealed for a prolonged period of time as was seemingly the case here. . The edge bonding has prevented this from occurring causing gapping and splitting of greater extent than might otherwise have been expected. Obviously, these findings relate to the flooring in Apartment 1 only. As noted above, I have no evidence before me in relation to the other Apartments and make no findings in relation to the flooring in the Apartment block as a whole. The issuing by the Architect of a Final Certificate on 31 January 2002 is not relevant in relation to apartment 1 which had been sold to the owners who had occupied it since 1 January 2002.

20. The application will therefore be dismissed. I will reserve the question of costs; and refer the builder's appeal on quantum to an administrative mention.