The Owners-Strata Plan No. 30791 v Southern Cross Constructions

Relevant legal principles

1. The principles relating to the adoption of reports prepared in accordance with UCPR r 20.14 were not in dispute. Relevantly, the court will normally exercise its discretion to reject a report to the extent that a referee has made an error of law or where the referee has failed to comply with the rules of natural justice or where the referee's report reveals an error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding. On the other hand, generally the court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise: Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2005] NSWSC 784 at [6]-[7]; Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633 [2014] NSWCA 184 at [24]. The court is also likely to reject a referee's report where the referee has exhibited actual bias or there is a reasonable apprehension of bias: Carbotech-Australia Pty Ltd v Yates [2008] NSWSC 540.

The issues

1. In the present case, the Active Defendants advance six reasons for why the Referee's report should not be adopted in this case: 1. the Referee was actually biased against the defendants or there was a reasonable apprehension of bias; 2. the Referee did not make any findings or provide any reason concerning what damage was caused to the building as a result of the Works. Instead, the Referee simply assumed that all the damage was caused by the Works and proceeded to quantify the cost of rectifying that damage; 3. in determining what damage required rectification, the Referee relied on drawings prepared by Alan L Wright & Associates which did not form part of any expert report relied on by the parties; 4. the costings for the rectification works were arrived at by the Referee in consultation with a colleague, Mr Jeffrey Gall, in circumstances where the extent of that involvement including the representations made by Mr Gall to the Referee and relied on by the Referee is unknown; 5. the rectification work allowed for by the Referee covers damage to both common property and to individual lots, despite the fact that the Owners Corporation is not entitled to sue for the costs of rectifying damage caused to individual lots; and 6. the Referee made an allowance for alternate accommodation costs for individual lot owners despite those costs not being loss or damage incurred or suffered by the Owners Corporation. In addition, the Referee did not address the question whether the alternate accommodation was required because of damage to common property or damage to individual lots.

Bias

1. The contention that the Referee was biased or that there was a reasonable apprehension of bias is based on some correspondence from the Referee at the start of the reference and comments made by the Referee in his final report concerning the Active Defendants' conduct of the reference.
2. The correspondence related to complaints that the fifth defendant had raised with the Referee about communications between the plaintiff's solicitors and the Referee in the absence of the other parties and with the way in which the fifth defendant understood the Referee proposed to conduct the reference. The Referee appears to have taken offence to some of that correspondence, which was reflected in the tone of some of his correspondence. So, to take just one example, on 20 October 2016, the Referee, responding to a letter dated 18 October 2016 he had received from the solicitors for the fifth defendant stating that the fifth defendant had to decide whether to apply to the court to have the reference terminated and describing some of the Referee's correspondence as fractious, said, among other things: We reject your description of the nature of my correspondence as "fractiousness". Your correspondence has been full of unsubstantiated allegations towards my appointment and bias. You have attempted to turn this Reference into a trial which it is note [sic], as noted in Paragraph D of Xuereb v Viola (1989) NSWLR 453. In fact, you have given me no opportunity, other than to read the various Reports (some 5,000 pages in six volumes), including those of the Experts, submitted to the Court. You have begrudged me the two site visits I made to acquaint myself with the issues at hand. … However, should you wish to pursue my termination, I will wait your submission to the Supreme Court with substantiation of your claims.
3. Despite that correspondence, the reference continued. Representatives of the parties met with the Referee on 21 October 2016 and following that meeting, the Referee circulated a document setting out revised procedures and methodology for the reference. In accordance with that document, there was no cross examination of witnesses. However, the Referee was provided with submissions. He addressed written questions to the parties' experts and conducted a site visit in the presence of some, but not all of them. He also issued a preliminary draft report and gave the parties an opportunity to provide further submissions on that draft before issuing a further draft on 17 February 2017.
4. On 6 March 2017, the first to fourth defendants wrote to the Referee stating that the draft report was not in accordance with the procedures previously circulated by the Referee because it reached tentative conclusions in relation to both the scope of the work and costings, whereas the first to fourth defendants contended that it should only have addressed scope. The Referee responded to that letter on 8 March 2017. There is nothing in that response to suggest anything other than that the Referee had considered the first to fourth defendants' complaints and decided to reject them on their merits.
5. The parties made further submissions to the Referee and the plaintiff served a report from Mr Allan Harriman regarding compliance with the Building Code of Australia which the Referee agreed to admit. He gave the defendants an opportunity to provide him with expert reports in response.
6. The Referee issued his final report on 31 August 2017. The report was extensive consisting of 173 pages and 795 numbered paragraphs. The report concluded that there were two options. One was to repair all damage resulting from the excavation work (Option 1). The other was to rebuild the eastern units of the building and the common areas associated with them and repair all damage to the remaining units (Option 2). The Referee chose Option 1, which was the cheaper option. He concluded that the cost of that option was $4,967,090.
7. The final report contained much of the material in the draft report. It also contained a section setting out the Referee's comments on the submissions he had received on the draft report. That section contained a number of passages which were critical of the way in which the defendants had conducted the reference. The Active Defendants rely on the following passages in the final report: 1. At paras [221] to [225] of the report, the Referee deals with the defendants' objection to his use of Mr Gall's assistance in reviewing the costs estimates. The Referee explains why he chose to use Mr Gall, why he thought his use of Mr Gall was consistent with the orders referring the matter to him and his view that the solicitors for the first to fourth defendants appeared to have misunderstood Mr Gall's role. In particular, the Referee makes the point that ultimately the costings were his. The Referee then concludes (at para [226]): I assume that this [meaning the first to fourth defendants' objections to Mr Gall's involvement] [is] a tactic by the Defendants to discredit and delay this Reference Report through continued objections without providing anything of factual substance. 1. At para [262], the Referee states "The Defendants have apparently misunderstood, or chose to confuse, the difference between displacement of floor joists and the need for floor levelling …". 2. At para [269] of the report, the Referee refers to the report of Mr Tony Makin, an expert quantity surveyor engaged by the defendants. Commenting on that report, the Referee says: With respect to Mr Makin's second report (contained as an appendix to Annexure AI - Supplementary Reports by the 1st to 4th Defendants), I note that Mr Makin was not available to visit the site in December 2016 with myself and the other Experts and his report is mainly a review of the Executive Summary of the Draft Reference Report of 17 February 2017 and a critique of the costings in Annexure AD of that Draft. As previously noted in Paragraph 234, his review has not read of the bulk of my determination and has sought to discredit, per his brief, the Reference Report in general. 1. At para [279] of the report, the Referee refers to the allowance he had made for a traffic controller during the rectification works, which had been questioned by Mr Makin in his second report. Commenting on that, the Referee says: The questioning of this allowance (and indeed all the costs) is reflective of the hurried approach by Mr Makin [in] reviewing the Draft Refence [sic] Report. And in the following paragraph: I reject the 1st to 4th Defendants' opinion the rectification works are minor (this is their expected position). The amount of work required, as demonstrated by the number of trades involved in the rectification works … will cause significant disruption to the occupants of the building 1. In para [316] to [317] of the report, the Referee deals with the fifth defendant's submissions on relocation costs. He says this: 316. The lawyers for the 5th Defendants have endeavoured to demonstrate that the costs for the relocation of the owners / occupants of the apartments is, effectively, is [sic] recoverable from the Owners' Corporation and not the Defendants by (strategic) reference to legislation and case law. The specific case law in that the of the judgement rendered by Meagher JL [sic] in Strata Plan 79215 v Nazero Constructions Pty Ltd [2016] 231 which, as I understand it, is a matter dealing with the rectification of defects under the Home Building Act 1989 (NSW). 317. I have not researched Strata Plan 79215 v Nazero on the basis it deals with a specific breach of statutory warranties under the Home Building Act 1989 (NSW) and Meagher JA's opinion may or may not be relevant. Further, I do not believe I have the required competence to debate the merits of Strata Plan 79215 v Nazero with Strata Plan 30791 v Southern Cross Constructions & Ors. However, I am cynical of the ploy as it implies the individual owners of the apartments would need to seek redress from the Owners' Corporation for relocation and accommodation costs even though the damage was due to the construction works on the adjoining site. 1. At para [342] of the report, the Referee states: The various Defendants' lawyers raised several challenges to the procedure and process following the release of the Draft Reference Report. I have included the correspondences and my responses to those as Annexures for completeness. I have summarised the contents of the same in the following sections and paragraphs. The purpose of these challenges, as far as I can infer, was to prepare submissions to the Supreme Court to have the Reference Report rejected. I believe my responses clearly refuted those challenges as no further correspondence was received form the Defendants' lawyers.
8. It was undesirable for the Referee to communicate with the plaintiff's solicitors in the absence of representatives of the defendants and for correspondence between the plaintiff's solicitors and the Referee not to have been copied to the defendants. In some cases, private communications between the decision maker and one of the parties can form a reasonable basis for the apprehension of bias. However, in my opinion, the private communications in this case do not fall into that category. The communications occurred at the beginning of the reference. They were preliminary in nature. The Referee is not a trained lawyer, and he is unlikely to have appreciated the significance of private communications, particularly when the solicitors for the plaintiff engaged in them without apparently suggesting that they may be a source of concern. As soon as the issue was drawn to the Referee's attention, they ceased. The defendants raised no objection to the reference continuing once they became aware of the communications.
9. Two points may be made about the comments made by the Referee on which the Active Defendants rely.
10. First, most of those comments were made in the Referee's final report. It is clear from them that the Referee formed a dim view of the way in which the defendants had approached the reference. However, the fact that the Referee formed that conclusion and expressed it does not indicate that he was actually biased against the defendants or that there was a reasonable apprehension of bias. The expression of conclusions formed as part of the decision making process does not suggest that the decision making process was affected by bias. It simply suggests that as part of that process the Referee formed certain adverse conclusions.
11. Second, looking at the material as a whole it could not be concluded that the Referee's views on the procedural issues raised by the defendants affected his ability to deal impartially with the substantive issues. The comments which are said to point to actual bias or a reasonable apprehension of bias are contained in a few paragraphs of a lengthy and detailed report and a few letters written early on in the reference. They exhibit a degree of frustration with the procedural issues raised by the defendants. But again it needs to be borne in mind that the Referee is not a trained lawyer. His frustration with procedural issues and his expression of those frustrations in language that was critical of the defendants does not demonstrate that he was incapable of dealing with the substantive issues on their merits. Nor would it suggest that that was the case to the informed reasonable lay observer. The Referee published a draft report and gave the parties ample opportunity to comment on that draft. He appears to have taken into account the comments he received and the report seeks to deal with each of those comments on its merits. None of that suggests actual bias or a reasonable foundation for apprehended bias.

Reasoning about causation

1. I do not accept the contention that the Referee failed to address the question of what damage was caused to the building as a result of the Works.
2. The Referee considered a number of possible explanations for cracks in the building. One was whether the cracks were pre-existing. On that question, the Referee said this at para [492] of his report: The Defendants, via their Expert Witnesses, have placed some emphasis on pre-existing damage and there is much comment in their respective reports regarding this issue. The lawyers for the 1st to 6th Defendants … have deemed rectification of pre-existing damage to be betterment claiming: "…make a deduction…in relation to improvement and/or savings arising from the repair of pre-existing damage…"
3. The Referee then addressed in detail the question whether any of the damage was pre-existing largely by reference to dilapidation reports prepared by Hughes Trueman following inspections of the building prior to the Works being carried out. By comparing what was disclosed by the dilapidation reports with the Referee's own inspections and photographs provided by the owner of unit 2, the Referee reached conclusions about the cracking that had been caused by the Works on the adjacent property.
4. The Referee also considered a report prepared by Mr Greg Beard, an expert retained by three of the defendants, and the opinion expressed by Mr Beard that an increase in the cracking since the preparation of the dilapidation reports was due to existing conditions and not the Works. After viewing the underlying brickwork and conducting intrusive investigations, the Referee concluded that the damage to the brickwork had been "caused by the construction work (vibrations and settlement) of the adjoining property" (at [543]. The Referee also gives a number of other reasons for concluding that the cause of the cracking of the external brickwork was the work on the adjacent property.
5. The Referee also rejected an opinion expressed by Mr Beard that the existing footings of the building work were inadequately designed and constructed. On that issue, the Referee said (at [610]): Mr Beard, in Section 6.2 of his Report, has suggested that the existing footings to [the Property] were inadequately designed and constructed and should have been piered to stable ground. Whilst this methodology would likely be used in modern construction processes, it was not considered necessary during the 1920's / 1930's, probably due to the limited height of the building. The fact remains that the existing structure adequately supported the building up until the time of the adjoining construction. In his response to my query, Mr Beard acknowledged this … with the added qualification that it "…is not appropriate to rely on past performance as an indication of structural adequacy, when as has occurred an event such as the construction works occurs and then results in major failures. Should the footings been piered to bedrock then it is unlikely that these failures would have occurred…" this being said with the benefit of hindsight. I would argue that sufficient investigations should have been undertaken to prevent the damage in the first instance.
6. The Referee also considered whether some of the damage had been caused by trees and rejected that conclusion at para [621]-[624] of his report. It is plain that he gave extensive consideration to the question of causation.

The Wright Drawings

1. The drawings in question were prepared by Mr Alan Wright, a structural and civil engineer, following inspections of the building in November 2010 and February and March 2011 (the Wright Drawings). Mr Wright prepared a report dated 17 July 2011, which was provided to the Referee by the plaintiff. However, the drawings were not attached to that report and came before the Referee as an attachment to a report prepared by Mr Simon Matthews, another structural and civil engineer retained by the plaintiffs. The Active Defendants appear to have two complaints about the use of those drawings. First, the drawings did not form part of Mr Wright's report and none of the Active Defendants had had an opportunity to cross-examine Mr Wright on them. Second, none of the defendants' experts commented on the drawings.
2. The Wright Drawings show the location and details of cracking. They were placed before the Referee by the plaintiff. The defendants knew that they were one of the matters that the Referee proposed to take into account and they had an opportunity to comment on those drawings. It was open to the Referee to use those drawings as a starting point and compare them with his own observations of the units. He was not bound only to consider the expert reports relied on by the parties. For those reasons, in my opinion, he was entitled to rely on the Wright Drawings.

The involvement of Mr Gall

1. The complaint in relation to Mr Gall is that the Referee consulted with Mr Gall and appears to have taken into account the views expressed by Mr Gall in forming his own opinions in circumstances where the defendants were never given an opportunity to comment on those opinions.
2. In my opinion, there was not a denial of natural justice. The parties knew that the Referee proposed to involve Mr Gall and did not object to his involvement. The Referee stated in his report that, although he had obtained the assistance of Mr Gall, the opinions he expressed in his report were his own. Those opinions were provided to the parties in the form of a draft report which contained the Referee's reasoning. To the extent that the Referee formed opinions that did not reflect any of the submissions made to him and were influenced by Mr Gall, the defendants were given a reasonable opportunity to make submissions in relation to those opinions.
3. The Active Defendants submit that the involvement of Mr Gall is analogous to a case where a referee received private representations from one of the parties or one of the parties' experts, which would be a breach of the rules of natural justice. As Cole J said in Xuereb v Viola (1989) 18 NSWLR 453 at 470: How are such principles to be reconciled with Pt 72, r 8, and in particular r 8(2)(b) which permits the referee to "inform himself … in relation to any matter in such manner as the referee thinks fit". Further, it has become common for orders made pursuant to Pt 72, r 8(1), to permit a referee "to communicate with expert retained on behalf of the parties or any of them". The utility of such a direction is obvious for it enables a person technically qualified who does not understand a particular technical aspect of the report of an expert retained by a party to inquire of that expert what he meant. But such an order is not to be understood as permitting a referee to have a private conversation with one expert. He may call the experts for opposing parties together to seek clarification, or he may arrange a conference telephone discussion with the experts for competing parties. Pursuant to r 8(2), the referee may be permitted to carry out his own tests. But if he does so, prior to preparing his "just opinion" he must give, in most cases, the information so derived to the competing parties to permit them to express their views upon it to him. There is nothing in Pt 72, r 8, or in the usual order made by the Court pursuant to r 8 (1) which permits private discussions between the referee and only one party or his expert. Similarly, normally if communications are received by a referee from a party they should be provided to the other party, unless it has previously been arranged that the party providing a document to the referee will also provide it to his opponent.
4. However, in my opinion, the present case is not analogous. Rather, the Referee made his own enquiries. He set out the results of those enquiries in the form of a draft report and gave the parties an opportunity to comment on those conclusions. That did not involve a denial of natural justice.

Identification of common property

1. The Referee reached the conclusion that internal walls "must be treated as common property because of their structural nature" at para [244] of his report, although he pointed out that that conclusion was based on s 6 of the Strata Schemes Development Act 2015 (NSW) (the 2015 Act) and that he had been "unsuccessful in determining whether the Strata Laws in place at the time [that is, the time at which the relevant strata plan was registered] had similar provisions regarding the delineation of 'common property'" (at [245]).
2. It is common ground that the position is now governed by the 2015 Act. Clause 4 of Schedule 8 of the 2015 Act provides on the date of repeal of the predecessor Act, the Strata Schemes (Freehold Development) Act 1973 (NSW), a strata scheme in existence under that Act is taken to be a strata scheme under the 2015 Act. Section 4 of the 2015 Act contains the following definitions: a. common infrastructure, means: (a) the cubic space occupied by a vertical structural member of a building, other than a wall, or (b) the pipes, wires, cables or ducts that are not for the exclusive benefit of one lot and are: (i) in a building in relation to which a plan for registration as a strata plan was lodged with the Registrar-General before 1 March 1986, or (ii) otherwise - in a building or in a part of a parcel that is not a building, or (c) the cubic space enclosed by a structure enclosing pipes, wires, cables or ducts referred to in paragraph (b). b. common property, in relation to a strata scheme or a proposed strata scheme, means any part of a parcel that is not comprised in a lot (including any common infrastructure that is not part of a lot). c. lot, in relation to a strata scheme, means one or more cubic spaces shown as a lot on a floor plan relating to the scheme, but does not include any common infrastructure, unless the common infrastructure is described on the plan, in the way prescribed by the regulations, as a part of the lot.
3. It is also common ground that the question whether internal walls form part of the common property is a question of law and therefore ultimately a question for the court, not the Referee. It was also common ground that any conclusion on that question in the present context would not be binding on the parties at the final hearing, since that conclusion would be interlocutory in nature.
4. Had the Referee adopted the approach of the plaintiff's expert quantity surveyor, Mr Mark Lamond, and separated out the costs of rectifying the damage to each unit, it would not have been necessary to address the question whether internal structural walls formed part of the common property. The Referee's report could have been adopted except on that question and that question could have been left to the trial judge. It would then have been possible at the final hearing to determine the costs of rectification by reference to the Referee's report in light of the trial judge's conclusion on the question of what was and was not common property.
5. Unfortunately, however, the Referee did not adopt that approach. Instead, he chose to identify the costs of rectification by reference to trades, without separating out those costs that related to structural internal walls and those that related to external ones. Consequently, if the court concludes that the structural internal walls do not form part of the common property, the report will be of no assistance in determining the question of damages.
6. The question that arises is the best way forward in those circumstances. One possibility is simply to determine the question and either reject or admit the report on the basis of that determination. However, if the court concludes that the report should be admitted on that basis but the trial judge takes a different view, the report will be of no use. On the other hand, if the report is rejected, the parties will, despite the costs of the reference, have to address the question of damages in some other way, even though it is possible that the trial judge could reach conclusions which made the report relevant.
7. To some extent these problems could be overcome if the issue of whether the internal walls formed part of the common property was determined as a separate question before the motion was finally determined. However, that would not be a complete solution, since if the separate question was determined in a way that meant the Referee's report had to be rejected, it would still be necessary to address how the question of damages was to be determined. Moreover, understandably, none of the parties represented at the hearing of the motion was in favour of the issue being determined as a separate question at the time the motion was heard; and the court could not have done so without giving the other defendants an opportunity to be heard.
8. Taking account of these considerations, I have concluded that the best way forward is for the matter to be referred back to the Referee to prepare a supplementary report which quantifies the rectification costs in a way that permits his report to be used on the question of quantification irrespective of the answer to the question whether all the damage was to common property.
9. I accept that that supplementary report will be unnecessary if the court ultimately concludes that all the damage was to common property and is therefore recoverable by the plaintiff. However, there appears to be a strong argument that not all the damage identified by the Referee was damage to common property. "Common property" means "any part of a parcel that is not comprised in a lot (including any common infrastructure that is not part of a lot)". "Lot" means "one or more cubic spaces shown as a lot on a floor plan relating to the scheme, but does not include any common infrastructure". It is plain in this case that internal walls are not shown on the floor plan relating to the strata scheme. The only question, therefore, appears to be whether they could be regarded as "common infrastructure". "Common infrastructure" relevantly means "the cubic space occupied by a vertical structural member of a building, other than a wall". The effect of this definition appears to be to exclude internal walls from what might otherwise be common infrastructure and therefore to include them in the definition of a lot, with the result that they do not form part of the common property. Consequently, the prospects that the work associated with the supplementary report will be wasted appears to be small.
10. I also recognise that an alternative approach would be to adopt the report except for the Referee's conclusions on the meaning of common property and allow the case to go to trial on the question of liability and the question of what falls within the definition of "common property", leaving it to the trial judge to determine what should happen if he or she concludes that structural internal walls are excluded from the definition of common property. However, there are two difficulties with that approach. The first is that it seems to me that it will be more difficult for the Referee to address the question if there is a substantial delay before he is asked to do so. The second is that I assume that the parties thought that it would be desirable to obtain the Referee's report before the court determined questions of liability because the quantification of the loss would aid settlement discussions. That advantage will be lost if a supplementary report is not obtained now.

Alternate accommodation costs

1. This issue raises a similar difficulty as the previous one. The Referee concluded that all rectification work he identified was recoverable by the plaintiff. He concluded that in order to carry out all of that work it was necessary for the occupiers of each lot to move out. He allowed and calculated accommodation costs on that basis. The Referee's report does not address the position if the work repairing internal walls is not work that is recoverable by the Owners Corporation because the relevant damage is not damage to the common property.
2. The Active Defendants conceded during the hearing of the motion that, to the extent that it is necessary for occupants of lots to move out while work is being undertaken to common property, then the costs of alternate accommodation are recoverable. That, however, raises the question whether, if work on internal walls does not form part of work in respect of which the Owners Corporation is entitled to recover, it is necessary for the occupants to move out at all while the work in respect of which the Owners Corporation is entitled to recover is being undertaken. It also raises the question whether, if the answer to the previous question is in the affirmative, the costs of alternate accommodation should be reduced to allow for the reduced scope of work in respect of which the Owners Corporation is entitled to recover. Again, because of the approach taken by the Referee, he has not addressed those questions.

Conclusion

1. In my opinion, the court should make a direction under UCPR r 20.17(1)(b) requiring the Referee to prepare a supplementary report setting out his conclusions on the costs of rectification including the costs of providing alternate accommodation to the occupants of the lots comprising the strata plan in a way which permits the court to identify the costs of rectification of the common property in the event that the court concludes that internal walls (including internal structural walls) do not form part of the common property of the strata plan and consequently are not costs in respect of which the Owners Corporation may recover.
2. In view of that conclusion, I make the following orders: 1. Stand the matter over until 9.30 am on Monday 11 December 2017, or such other date before the end of court term as is fixed with my Associate, to hear submissions on the precise form of the orders that should be made to give effect to this judgment; 2. Stand the plaintiff's notice of motion filed on 22 September 2017 over to a date to be fixed immediately following receipt of a supplementary report from Mr Nicholas Ferrara prepared in accordance with orders made pursuant to order (1); 3. Reserve the question of costs of the plaintiff's notice of motion filed on 22 September 2017.

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: 01 December 2017