The Owners-Strata Plan 86807 v Crown Group Constructions Pty Ltd

Background

1. The contract for the construction of the development was entered into on 30 April 2012. The final occupation certificate was issued on 12 December 2014. The owners corporation commenced these proceedings on 6 December 2016 alleging that there were a number of defects in the building work and claiming damages for breach of the warranties implied by the HBA. The proceedings have progressed slowly, largely it seems because the defendants have by agreement with the owners corporation carried out rectification works in respect of defects the subject of the claim.
2. Questions about the suitability of the cladding were first raised in 2018. It appears that at that time the defendants, prompted by queries raised with the owners corporation by the Cladding Task Force established by the NSW Government about the cladding and in order to allay any concerns that the owners corporation might have in that regard, obtained a report prepared by Mr Stuart Boyce of BCALogic dated 20 May 2018 in relation to the cladding. A copy of that report was provided to Ms Shannon Isemonger, a partner at DEA Lawyers Pty Ltd, who acts for the owners corporation. Ms Isemonger sought comments on that report from Mr Paul Jones of Enercon Engineering, an expert retained by the owners corporation. In an email dated 13 July 2018 to Ms Isemonger, Mr Jones expressed the opinion that: Following your instruction, we have reviewed the BCA logic cladding report and found that the report confirms that the Cladding used on this project is compliant. The report appears to cover all relevant concerns.
3. Nothing then happened until December 2021. At that time, Ms Isemonger decided to engage Mr Adam Southwell of Credwell Consulting to undertake further investigations of the cladding. It appears that that decision was taken following receipt of an email dated 7 December 2021 from the strata manager which suggested that as a consequence of changes to the "Code" (presumably a reference to the Building Code of Australia) the cladding on the façade may no longer be compliant, with the result that an exclusion in the insurance policy in respect of the strata building would apply. Ms Isemonger also says that her decision to obtain further advice on the cladding was prompted by the fact that she had been acting for the owners corporation of another strata development in relation to cladding issues where Crown Group was the builder.
4. Ms Isemonger says in her affidavit evidence that after receipt of preliminary advice from Mr Southwell, she was instructed by the owners corporation to file a notice of motion "to add the combustible cladding to the Proceedings". That notice of motion was filed on 10 December 2021.
5. For reasons that are not fully explained by the evidence, the motion was not heard until December 2022. Part, but not all, of the delay can be explained by discussions between the parties about the amendments, amendments both to the notice of motion and to the proposed list statement and further investigations undertaken by the owners corporation. As part of those investigations, the owners corporation obtained a report dated 22 February 2022 from Credwell Consulting described as a "peer review" of the report prepared by BCALogic in 2018. The report prepared by Credwell Consulting concludes: Based on the review of the documentation provided there is no evidence to show that the cladding complied with the BCA that applied at the time of construction. All documents provided to support the use of the ACPs are retrospective to the construction of the subject building, and contain limitations that do not confirm the cladding systems meet: ● The non-combustible external wall requirements of Clause C3.1 of Specification C1.1 of BCA 2012; ● The attachment to a wall, roof or awning requirements of Clause C2.4 of Specification C1.1 of BCA 2012.
6. According to evidence given by Ms Isemonger, Credwell Consulting has been instructed to prepare a supplementary report on the cladding at the property including testing cladding samples to confirm whether the cladding was compliant with the BCA at the time of construction and if not, to consider performance solutions or appropriate rectification works. It appears that that report had not yet been obtained.

The amendments

1. Only two amendments are sought to be made to the claim for breach of the warranties contained in the HBA. One is to add an allegation that the defects contained in the common property include: (e) Combustible cladding to the façade of the Building The other amendment is to add the following to a "Particulars of Defects Schedule": Façade-cladding The external façade of the building does not meet the deemed to satisfy requirements of clause C2.4 of Specification C1.1 of the Building Code of Australia 2012 and uses materials that constitute an undue risk of fire spread via the façade of the building.
2. The central allegations in relation to a claim for breach of the duty of care implied by the DBP Act are contained in paras 33 and 34 of the proposed amended list statement. Those paragraphs are in the following terms: 33. The duty of care owed by Crown Construction to the Plaintiff required it to exercise reasonable care to: (a) design an external facade that: (i) was non-combustible in accordance with clause C3.1 of Specification C1 .1 of the Building Code of Australia 2012 (the BCA); and / or (ii) did not constitute an undue risk of fire spread via the facade of the building in accordance with clause C2.4 of Specification C1 .1 of the BCA; and/ or (iii) otherwise complied with the BCA. (b) select and install a cladding product on the external facade that: (i) was non-combustible in accordance with clause C3.1 of Specification C1 .1 of the Building Code of Australia 2012 (the BCA); and/ or (ii) did not constitute an undue risk of fire spread via the facade of the building in accordance with clause C2.4 of Specification C1 .1 of the BCA; and/ or (iii) otherwise complied with the BCA. (c) carry out all necessary detailed investigations to satisfy itself that the material it selected for installation, and then installed, on the facade of the Building was: (i) was non-combustible in accordance with clause C3.1 of Specification C1 .1 of the Building Code of Australia 2012 (the BCA); (ii) did not constitute an undue risk of fire spread via the façade of the building in accordance with clause C2.4 of Specification C1 .1 of the BCA; (iii) otherwise complied with the BCA: and (iv) was compliant with the obligations imposed on Crown Constructions by section 18B of the HBA. 34. Crown Constructions breached the duty of care owed by it to the Plaintiff. Particulars (i) Crown Construction failed to exercise reasonable care to avoid economic loss caused by defects in or related to the building for which the work was done, including that it installed aluminium composite cladding on the Building in circumstances where: (1) it is combustible because it has a polyethylene core; (2) the combustible cladding posed an undue risk of fire spread via the facade of the building; (3) by reason of the matters in (1) and (2), is in breach of the BCA; and (ii) the risk of the Plaintiff suffering economic loss as a result of Crown Construction's conduct in (i) was foreseeable because those risks were either actually known by Crown Construction or, in any event, ought to have been known by Crown Construction; (iii) the risk of the Plaintiff suffering economic loss as a result of Crown Construction's conduct in (i) was not insignificant; (iv) a reasonable person in Crown Construction's position would have taken specific precautions against the risk of harm, including: (1) designing an external facade that: (A) was not combustible; (B) did not constitute an undue risk of fire spread via the facade; (2) selecting and installing a cladding product on the external facade that: (A) was not combustible; (B) did not constitute an undue risk of fire spread via the facade; including that if a cladding product had not been certified as non-combustible within the meaning of AS1530.1, obtaining such certification.

The issues

1. The defendants object to the amendments on four bases: 1. the claim for breaches of the warranties implied by s 18B of the HBA is out of time; 2. the amendments are futile because there is no evidence that the cladding did not comply with the BCA at the time that it was installed; 3. the Court in the exercise of its discretion should refuse leave to amend because no adequate explanation has been given for the delay and the amendments are likely to cause the defendants prejudice; and 4. the claims are liable to be struck out because they are inadequately pleaded.

Issues relating to the limitation period

1. In their submissions, the parties attached some significance to the question whether the limitation period in respect of a claim for breach of the warranties implied by s 18B of the HBA in respect of the façade has now expired and whether that claim introduces a new cause of action. This second question arises because there is authority to the effect that for the purposes of the principle of res judicata "there is but one cause of action for breach of contract founded upon breach of a promise such as to carry out the work in good and workmanlike manner", with the result that the plaintiff must bring a claim for all defects in the one proceeding: Onerati v Phillips Constructions Pty Ltd (in liq) (1989) 16 NSWLR 730 at 746 (Giles J) (Onerati). That principle has been extended so that it applies for the purposes of determining whether a limitation period applies to a claim based on breaches of the warranties contained in s 18B of the HBA, although given that different limitation periods apply depending on whether the breach results in a major defect or a minor one (six years in the former case; two years in any other case) (see HBA, s 18E), it is not easy to see how there could be a single cause of action for all breaches of the warranties, or each of the warranties, implied by s 18B.
2. The principle stated in Onerati has also been applied to the extension of the warranties contained in s 18B by ss 18C and 18D of the HBA, the effect of which is that the owners corporation, as successor in title to the developer, is entitled to the benefit of the statutory warranties as against the developer and is entitled to the same rights as the developer had against the builder in respect of the statutory warranties: see The Owners - Strata Plan No 90018 v Parkview Constructions Pty Ltd [2022] NSWSC 1123.
3. However, why the application of the principle stated in Onerati is important in the current context is not entirely clear. Section 64(1) of the Civil Procedure Act 2005 (NSW) (CPA) confers on the Court a broad power to permit an amendment at any stage of the proceedings. Section 64(2) provides: Subject to section 58 [which relevantly requires the Court to act in accordance with the dictates of justice in considering whether to allow an amendment], all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect of error in the proceedings and avoiding multiplicity of proceedings.
4. Section 65 of the CPA permits a plaintiff, after the expiration of the relevant limitation period and with leave of the Court under s 64, to amend the originating process relevantly to add a new cause of action and claim for relief that arises out of the same or substantially the same facts as those giving rise to an existing cause of action and claim for relief. Under s 65(3), unless the Court otherwise orders, the amendment takes effect from the date on which the proceedings were commenced. Section 65(4) provides that "[t]his section does not limit the powers of the court under section 64".
5. The effect of these provisions is that the Court has a discretion to permit an amendment, even if the amendment introduces a new cause of action which is statute barred. In exercising that discretion, the Court must give effect to the principles stated in ss 56-60 of the CPA, which broadly speaking require the Court to give effect to the overriding purpose of the Act and rules of court to facilitate the just, quick and cheap resolution of the real issue in the proceedings and to act in accordance with the dictates of justice. The Court has no power under s 65 of the CPA to permit an amendment where the proposed claim arises out of a new set of facts, as is the case here.
6. In exercising the power under s 64, it should not matter whether an amendment that seeks to raise a new defect raises a new cause of action or not. In either case, the critical issues include whether there has been an adequate explanation for the delay in adding the new claim, whether the claim has reasonable prospects of success, the prejudice the defendants will suffer if the amendment is allowed and the prejudice the plaintiffs will suffer if it is not. I return to those issues below. However, one thing is apparent from what has been said and that is that, unless the amendment is permitted, the owners corporation will not be permitted to make a claim for breaches of the warranties contained in s 18B of the HBA in respect of the façade in separate proceedings, either because those proceedings would now be statute barred or because the doctrine of res judicata would apply.

The claim under the HBA

1. In my opinion, there are three broad discretionary reasons for refusing leave to amend the claim under the HBA. The first is that there is no evidence before the court that the plaintiff has an arguable case that the cladding did not conform with the BCA. The second is that the plaintiff had an ample opportunity to investigate the cladding but did not do so. The third is that the delay is likely to have caused the defendants prejudice.
2. As to the first of these issues, the owners corporation has not produced any evidence that the cladding is defective in the sense that it does not comply with the BCA as it existed at the time the relevant construction contract was entered into or at the time of construction. All the report prepared by Credwell Consulting states is that there is no evidence that the façade complied with the BCA at that time.
3. As to the second issue, the owners corporation has been aware of a possible issue in relation to the façade since 2018. The owners corporation submits that any delay is not its responsibility because it was misled by the defendants into believing that there was no issue in relation to the façade and that it only became aware of a possible issue recently. However, in my opinion, that is a mischaracterisation of events. When the issue was raised in 2018, the defendants provided the owners corporation with a report which stated that there was not a problem with the façade. The owners corporation chose not to rely on that report but instead retained its own expert to review that report. It seems clear that it relied on the result of that review. It was open to the owners corporation to ask for a more thorough investigation but it chose not to. Instead, it was content to rely on the review conducted by Mr Jones. Even after the issue was raised again by the strata manager, it has taken more than a year for the owners corporation to obtain a further report on the question whether the façade is defective, and it still has not done so.
4. As to the third issue, a claim under the HBA is not apportionable: see Owners Corporation Strata Plan 64757 v MJA Group Pty Ltd (2011) 81 NSWLR 426; [2011] NSWCA 236 at [52] (Young JA); Civil Liability Act 2002 (NSW), s 34(3A). Consequently, if the amendment is allowed, it is to be expected that the defendants will want to investigate whether they have a claim against a third party - such as the supplier of the cladding, the subcontractor responsible for installing it or the architect who designed the building. To the extent that those claims could be brought in negligence, they are unlikely to be statute barred. However, to the extent that the claims could be brought in contract, they are likely to be statute barred. That is significant, since any relevant contract is likely to include warranties that are more favourable to the defendants and correspond more closely to the warranties given by the defendants under the HBA.
5. For example, the evidence is that the Builder engaged Sydney Plaster Pty Ltd to install the cladding. It is unclear from the evidence whether Sydney Plaster was responsible for selecting the precise type of cladding used on the relevant building. However, under the Scope of Works that formed part of the subcontract, Sydney Plaster was required to "supply … all labour, supervision, plant, equipment and materials as required to, manufacture, supply, deliver, handle, and installation of … the aluminium composite cladding works, in accordance with the drawings …". The relevant subcontract contains a warranty (in cl 2.5(e) of the Subcontract Conditions) by Sydney Plaster that "it will construct and complete the WUS [work under the Subcontract] in accordance with the Subcontract documents so that the Subcontract Works, when completed, will comply with all the requirements of the Subcontract and be fit for its intended purpose". It also contains a warranty (in cl 9.6 of the Subcontract Conditions) that Sydney Plaster must "ensure that the Main Contractor, the Principal and the Subcontractor have the joint and several benefit of any manufacturer and supplier warranties for equipment, machinery and manufactured items incorporated into the Subcontract Works …". Lastly, Sydney Plaster was required (by cl 11.1 of the Subcontract) to "satisfy all legislative requirements" (which is defined in a way that would include the BCA) and "upon finding that a legislative requirement is at variance with the Subcontract" to promptly give the Subcontract Superintendent written notice thereof". Based on these provisions, it appears that if the cladding is defective, the Builder would have had a reasonably arguable claim against Sydney Plaster, if it had not been statute barred.
6. If the only difficulty with the proposed amendment was the first one, it may have been appropriate to defer consideration of the amendment until the owners corporation has obtained a further report from Credwell Consulting. However, in view of the other matters I have referred to, in my opinion, it is not in the interests of justice to permit the owners corporation to bring a claim in respect of the façade under the HBA now.

The claim under the DBP Act

1. The principal difficulty with the claim under the DBP Act is that it is inadequately pleaded because it does not give proper particulars of how it is said that the Builder was negligent. The closest the pleading comes to a proper allegation of negligence is the allegation in para 33(c) that the Builder was under an obligation to carry out all necessary detailed investigations to satisfy itself that the cladding was not combustible and otherwise complied with the BCA and inferentially that the Builder did not carry out those investigations. However, it is unclear what investigations it is alleged that the Builder should have undertaken. For example, is it alleged that the Builder acting reasonably would have made enquiries of the supplier or manufacturer about those things and failed to do so, or is it alleged that it should have undertaken its own tests of the cladding material and failed to do so or is it alleged that the Builder failed to undertake some other type of investigation? It is not sufficient simply to allege, as the pleading apparently does, that the Builder was under a duty to undertake whatever enquiries would have revealed that the cladding was defective because it was combustible or failed to comply with the BCA (assuming that that was the case) and breached that duty because it did not discover that the cladding was defective. The problem with the pleading is exacerbated because, as the evidence stands, the owners corporation is not in a position to allege that the cladding is defective in the sense identified.
2. It may be that, once the owners corporation obtains a further report from its expert, it will be able to plead a claim in negligence properly. If it does so, that raises the question whether the pleading should be permitted or whether, having regard to the delay, it should not. Relevant to that question is the fact that a claim in negligence is apportionable, so that any liability that the Builder might have will be reduced having regard to the culpability of other parties without the necessity of joining those parties. Also relevant is the fact that the matter has not been set down for hearing. However, what weight should be given to these considerations will depend on the precise nature of the claim that the owners corporation might seek to advance.
3. In those circumstances, the best course appears to be to disallow the proposed amendments but to give the owners corporation an opportunity to replead its case against the Builder under the DBP Act if it wishes to do so and to make a final decision on whether the amendment should be allowed in light of the repleaded case.

Orders

1. Accordingly, the orders of the Court are: 1. Order that the further amended notice of motion filed in court on 13 December 2022 be dismissed with costs; 2. Direct that by 3 March 2023 the plaintiff serve on the defendants any proposed amended summons and amended list statement that includes a claim against the first defendant under the Design and Building Practitioners Act 2020 (NSW); 3. Direct that by 10 March 2023 the defendants notify the plaintiff whether it objects to the filing of any such amended document; 4. If the defendants object to the filing of any such document, direct that any motion seeking leave to file the documents be filed no later than 17 March 2023 and be made returnable on 24 March 2023; and 5. Stand the matter over to 24 March 2023.

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: 07 February 2023