The Owners - Strata Plan No 61162 v Lipman; The Owners - Strata Plan No 61162 v Building Insurers' Guarantee Corporation

Fire safety works 10The referee referred to the evidence of the witnesses who were called in relation to the fire safety works. The witnesses who gave testimonial evidence were Mr Villanti, Mr Thorburn, Mr Shipway and Mr Watkins. Mr Villanti was the proprietor of a lot in the development. His evidence was to the effect that at a particular time, he walked through levels 8 and 9 and made observations of the state of completion. Although Mr Villanti was not a builder, the referee found that his evidence was credible, being the evidence of "a careful and thoughtful witness" (R202). The referee found support, in the detail of Mr Villanti's evidence, for the conclusions that he reached. 11Mr Thorburn was an architect. He or his firm had been engaged by Avri as the project architect. Mr Thorburn was the supervisor. Mr Thorburn's evidence does not appear to have occupied a great deal of time in the referee's deliberative processes. 12Mr Shipway was Avri's project manager. The referee was not impressed by Mr Shipway as a witness. I think it is fair to say that in general, the referee was not prepared to act on Mr Shipway's evidence except to the extent that it was corroborated by contemporaneous documents. In this context, particularly bearing in mind the convoluted history to which I have referred and the passage of time, the referee's preference for contemporaneous documents as an accurate source of information is to be understood and approved. 13Mr Watkins was, at the time, the managing director of Lipman. The referee did not find his evidence to be helpful, in particular because it was conclusory. It appeared to the referee that Mr Watkins was giving evidence not from direct knowledge but, rather, at second hand. 14There was a measure of common ground in the way that the parties approached the fire safety issues. For example, it was common ground that in early 1999, Avri decided to redesign the layout of levels 8 and 9. It asked Lipman to quote. No agreement was reached for the performance of the works as redesigned. Nonetheless, Mr Thorburn, the architect and superintendent, instructed Lipman to proceed with levels 8 and 9 works including sprinklers and mechanical services work. It was common ground, and the referee found at R154, that the fire safety defects alleged by the Owners Corporation relate principally to fire dampers that form part of the mechanical services work - part of the work in respect of which Mr Thorburn instructed Lipman to proceed. 15The referee noted that Mr Shipway accepted that the instruction "was unqualified in any way by reference to the layout changes proposed for levels 8, 9 and 9 mezzanine" (R155). The referee set out (and obviously accepted) a passage from Mr Shipway's evidence, which included what appears to have been an acknowledgment by Mr Shipway that mechanical services work on levels 8 and 9 was to continue as originally planned despite the proposed layout changes. The referee found accordingly. 16That seems to me to be a finding of very considerable significance. It was not challenged. Nor could it be. 17In relation to levels 8 and 9, (there is no need to keep on referring to the level 9 mezzanine) fire safety works, the complaint made by Lipman was that the referee had not referred to what it said was cogent evidence of a change in Lipman's scope of work. That change was said to have occurred in August 1999, and to have arisen from two documents to which I will refer. I might add, at this stage, that although the referee did not expressly refer to those documents, he conducted an exhaustive analysis of the evidence, on the basis of which he concluded that the original scope of work in relation to levels 8 and 9 mechanical services had been completed whilst Lipman was still on site, and before St Hilliers came there. That analysis included reference to work done and invoices rendered by Lipman's subcontractor for the relevant services, a company known as Protair. 18Mr Goldstein of counsel, for Lipman, referred to the letters which, he said, showed a reduction in Lipman's scope of work. The first was written by Avri to Lipman on 12 August 1999. Omitting formal parts, it states as follows: We confirm that you are currently proceeding to complete the works on CP1 to CP3, Levels 1 to 7 and plant rooms, together with the base works to Levels 8 and 9, as soon as possible. The aim is to complete these works to allow the Sydney City Council to issue a certificate and for Avri to take possession of the building at the time to attempt to meet its obligations to purchasers of the units of Levels 1 to 7. We understand you are currently programming to complete this work in mid-September. We agree with you adopting this approach provided that you have in place necessary arrangements for the relevant services Trade Contractors to complete the remaining services work to Levels 8 and 9. This work would be completed under the terms of the existing Trade Contracts, however, Avri is prepared to supervise this work directly (or through its consultants) rather than require Lipman to attend to this work. Whilst understanding the Lipman does not wish to undertake the balance of the works on levels 8 and 9, which is mainly provisional work under the terms of our existing Agreement, we have agreed on the following approaches: a) Lipman to submit a proposal with respect to the above work on levels 8 and 9; or b) Avri to attend to this work directly and no payment will be made to Lipman for these works. We thus invite you to submit your proposal to us as soon as possible which we will discuss with you upon receipt. 19The second document to which Mr Goldstein referred was Lipman's response of 30 August 1999. Again omitting formal parts, it states as follows: We refer to your letter dated 12/08/99, in particular some anomalies between statements in the letter and actual fact. We accept your first paragraph except that we are aiming for completion by the end of September, not the middle. Secondly we are aiming only to complete the essential services to levels 8 and 9, not necessarily the 'base works'. Having said this, we will complete additional and non essential works, should the costs be agreed and subject to the works not effecting the delivery programme of 30/09/99. With respect to the issue of remaining works we must add that Lipman P/L are more than happy to complete the project in its entirety, what we were unable to accept was to proceed with the works without approval. We have however already submitted a proposal for level 8 and 9, of which we have received no feedback. Should Avri Investments P/L decide that they would prefer to complete the remainder of the works themselves, we had advised that we would not object to Avri approaching the contractors to complete the works directly contracted to Avri. This would however have to be treated as a separate agreement which excluded Lipman P/L from any liability or input. We trust this clarifies the situation. 20What is notable about those documents is that they do not define in any precise way the work (the base work, or essential services) that Lipman was to complete, nor indeed the work (the balance of work of levels 8 and 9) that Lipman was not required to complete. Some assistance can perhaps be obtained from the document, or proposal, referred to in the fourth paragraph of Lipman's response. That is a document of 24 June 1999. For level 8, it proposes a price of $747,712 for various works, of which some $75,960 relates to fire and mechanical services work. For level 9, it proposes a total price of $1,339,694, of which some $78,719 relates to fire and mechanical services work. That may be taken to indicate that the outstanding, or unperformed, portion, or "balance", of those works on those levels was relatively insignificant compared to the totality of work required. 21One might have thought that the CMA would throw some light on the topic. However, as I have noted, by some masterpiece of drafting ingenuity, it managed to include the subject works in both the GMP works (schedule 18) and the provisional works (schedule 19). Thus, no assistance is obtained from the CMA by Avri's classification of the balance of the works (in its letter of 12 August 1999) as "mainly provisional". 22Mr Shipway gave evidence in a statement as to what he regarded as "the essential services" to be. The referee did not refer to this. In part, no doubt, that followed because he did not refer to the two documents in question. In part, perhaps, it reflected his lack of enthusiasm for Mr Shipway as a reliable witness. 23Mr JJ Young of counsel, for the Owners Corporation, referred to expert evidence given by a Mr Hoyle. Mr Hoyle is an expert in fire safety. He said that his expertise includes "fire dampers and essential services". However, I do not think that it is legitimate to rely on the evidence of an expert, given some time after the relevant documents were exchanged, as an aid to the construction of those documents. I might add that equally I do not think it is legitimate to rely on Mr Shipway's evidence, even were it to be accepted, for the same purpose. There was no submission that any of this aspect of Mr Hoyle's or Mr Shipway's evidence reflected something notorious in the industry at the relevant time. 24Mr Goldstein's complaint - and it has force - is that, by failing to refer to evidence as to the change in the scope of Lipman's obligations under the CMA, the referee failed to consider properly the way in which Lipman put its case on this issue. Mr Bambagiotti of counsel, for BIGCORP, adopted Mr Goldstein's submissions in this and all other respects. 25Certainly, it would have been desirable for the referee to give consideration to the two documents in question, and to any other documents that, in his view, bore on the topic, with a view to completing his analysis of the relevant events, if only to indicate why, in his view, they were irrelevant. However his analysis proceeded in a slightly different way. The result of that analysis, I think, was to make it unnecessary for him to consider whether there had been any agreement as to a revised scope of works. On that approach, if I have understood the referee correctly, his omission to deal with the two documents may reflect no more than a particular application of the approach outlined by him at R17, to which I have referred. 26As I have foreshadowed, the approach taken by the referee was to examine the evidence to see what in fact was the work, in relation to fire safety on levels 8 and 9, actually done by Lipman (more accurately by its subcontractor Protair). The referee appears to have reasoned that if Lipman did the work, the implied statutory warranties would be attracted. That approach must be correct, I think. Accordingly, I do not think that it is necessary to consider in detail the reasoning of the Court of Appeal in a case on which Mr Young relied, Building Insurers' Guarantee Corporation v The Owners - SP 60848 [2012] NSWCA 375. I do however note that in that case, Bergin CJ in Eq (at [51] and Sackville AJA at [72]) in effect said, the implied statutory warranties are attracted to work that was done (or agreed to be done), not to work that falls outside the scope of the contract. I add that Macfarlan JA agreed with both their Honours. 27This case is in some respects factually the obverse to that on which Mr Goldstein based this aspect of his submissions. The question that the referee asked himself was: what was the work that Lipman did? He answered that question by saying, among other things, that it included the fire safety work on levels 8 and 9 that was found to be defective and that required repair. Since there was no basis for concluding that Lipman did it other than as a builder under the CMA, that completed the referee's investigation. 28If the two documents of August 1999 were crystal clear as to what work had been taken out of Lipman's scope, it would have been incumbent upon the referee to deal with them. But they were not crystal clear; they were not even clear in any usual sense of that word. Avri said in effect that it understood that Lipman was to proceed with, among other things, "the base works to levels eight and nine". Lipman said that it was "aiming only to complete the essential services" to those levels, "not necessarily the base works." 29If there were admissible evidence that identified what might be regarded as "base works", or evidence which identified what the parties themselves had in mind as "essential services" (apart from Mr Shipway's conclusory statements on the topic), I was not referred to it. And I repeat that evidence given after the event is not of assistance; evidence as to what the parties had in contemplation at the time they wrote their letters, and evidence as to what each might have understood to be the subject of the other's proposal, could be in a different category. But if there were any such evidence then, as I have said, I have not been taken to it. 30In those circumstances, I am not in a position to conclude that the letters were so clear that the referee was required to give detailed consideration to them on this topic. When one looks at the totality of the evidence which is summarised in the report, it paints a different picture. 31First of all, as the referee noted, there was the redesign. There was then the instruction to proceed with the levels 8 and 9 works. That instruction was agreed to be one which related to those works as originally tendered, unqualified in any way by reference to the layout changes. It thus included whatever was the content of the fire safety works under the original scope of works. 32It is common ground that the fire safety works included the installation of some dampers. I should note that Protair appears to have considered that the revised scope of works would require it to install additional dampers, for which it had not quoted. But nothing seems to me to turn on that, because it has not been suggested that the defective dampers are any other than those the subject of the original scope of works. 33Then, the referee analysed the contemporaneous documents. He placed particular weight on a Protair payment claim made in June 1999, under which Protair claimed the full value of its contract and, in addition, a number of variations. As the referee said at R164, Protair seems to have thought that its obligations were complete. And again, as the referee said at R165, Lipman appears to have taken the same view, because it passed on that claim to Avri for payment. The referee expressly rejected Mr Shipway's attempts to talk down the import of those documents. 34There was other evidence, to which the referee referred, which appeared to him to corroborate the proposition that the fire safety work, the subject of the original quotation on levels 8 and 9, had been completed. That included Mr Villanti's evidence to which I have referred already, and the evidence of a review undertaken by the mechanical services consultant retained by Avri. 35That consultant prepared a report in October 1999 which noted that the work was about 98 per cent complete. Although that document, and other documents to which I have referred and to which the referee referred, relate to a period after the exchange of correspondence in August 1999, the evidence is clear that Lipman did not leave site until some time later, and St Hilliers did not come on site until, probably, early 2000. 36In all the circumstances, the referee said that he was "comfortably satisfied that Lipman performed the mechanical services work, including the fire safety installation and dampers, the subject of the defects claimed...on levels 8 and 9" (R176). 37In my view, there was ample evidence to justify the referee in coming to that conclusion. There was, in addition, other, although less significant, corroborative material to which the referee then referred. 38In those circumstances, and given as I have said the obscure and unhelpful drafting of both the CMA and the letters exchanged in August 1999, I am not persuaded that the referee's omission to deal with the two letters shows any basis for doubting the validity of his conclusions, let alone that the matter should go back to him for further inquiry and report.

Air conditioning: the flexible ductwork 39I turn to the complaint about the flexible ductwork. The essential complaint made by Lipman is that the referee rejected its expert's views, but did not carry out any analysis to satisfy himself that the competing views expressed by the Owners Corporation's expert should be accepted (as the referee did accept them). Further, and as a subsidiary complaint, Lipman says that the referee did not deal with its submissions on the question of the amount to be allowed. 40The essential response made by the Owners Corporation is that there were agreed defects in the air conditioning system on the relevant levels. That this is so appears clearly from the joint report of the two experts, Mr Rabone (for the Owners Corporation) and Mr Duggan (for Lipman). 41In dealing with this defect, which was low air flow, they state that its location is "the majority of apartments". Mr Duggan said that the cause of the defect was the "low static pressure capabilities" of the air conditioning units. Mr Rabone denied this, and said that the cause was that the flexible ducting leading from those units to the outlets, was undersized. 42Mr Rabone estimated the cost of repair at $94,750. Mr Duggan said that he did not agree, but gave no alternative costing. That may perhaps reflect his primary approach - that there was no defect for which Lipman was liable. 43The referee dealt in some detail with Mr Duggan's evidence. He rejected it. Accordingly (R992) he concluded that the cause of the low air flows was the inadequate size of the flexible ducting, not low static pressures. 44I do not think that Mr Goldstein criticised the approach taken by the referee in rejecting Mr Duggan's evidence. If that were a criticism made of the referee, I would not accept it. The referee heard the whole of the evidence. He formed a view on it. His reasoning, as expressed in the relevant paragraphs of the report, shows that he understood the nature of Mr Duggan's comments and was not satisfied by Mr Duggan's evidence. The report betrays no relevant disregard of principle in that respect. Rather, as I have understood it, the complaint is that, having rejected Mr Duggan's evidence, the referee did not give reasons for accepting Mr Rabone's evidence. 45To my mind, there is an air of unreality to this aspect of Lipman's criticisms of the referee. The referee was confronted with the situation where, as the joint report agreed, there was a defect affecting the majority of the apartments - namely, low air flow. 46One expert said that X was the cause. Another said that Y was the cause. No expert (nor anyone else) said that Z, or A, or B, or L, or M, was the cause. 47The referee was confronted with a choice between two competing theories. The parties fought the case on that basis - that the cause was either X or it was Y. The referee said that it was not X. 48It follows, in my view, having regard to the way that the parties fought this aspect of the case, that the referee was entitled to say that Y was in fact the cause. Any other conclusion would have involved going beyond the expert evidence, and, in a practical sense, outside the boundaries of the dispute as it had been fought before the referee. 49I turn to the criticism of the referee's approach to costing. The referee said at R993: 993. No one addressed any submissions to the question of quantum other than Mr Duggan who in his report, Exhibit 30, indicates that the costs are too high. That was not supported by any submissions by any party for or against that proposition. I accept the OC's claim in the amount claimed. 50However, Mr Goldstein submitted, the referee had been given submissions which attacked Mr Rabone's costing. I was given extracts from Lipman's submissions to the referee: specifically (in two separate documents) paras 139 through to 145, and an incomplete para 146. Reading those submissions together, and acknowledging that (as a matter of forensic choice presumably) they are, in what was tendered, incomplete, they could be seen from beginning to end to deal with the question of whether there was any low air flow in the apartments, and whether (if there were) the cause was, as Mr Duggan's evidence suggested, the low static pressure capabilities of the air conditioning units. 51The submissions (so far as I have them) started by referring in paras 139 to 141 to Mr Rabone's evidence. Paragraph 141 included the assertion that the data relied on by Mr Rabone did not "support the claim that there are 2 flexible ducts that need to be replaced in 50% of the apartments". 52Paragraphs 142 and 143 then gave reasons why that conclusion should not be accepted. It is apparent that those paragraphs were directed to Mr Rabone's reasoning as to the cause of the low air flow, not to his evidence of costing. 53Paragraph 146 then turned to Mr Duggan's evidence. So far as I have it (and the paragraph is incomplete, in the material given to me), it set out aspects of Mr Duggan's evidence that, in the author's submission, meant that his view should be preferred. 54If it were intended, by the extract from para 141 that I have quoted, to suggest that not only Mr Rabone's opinion as to cause, but also his costing, were impugned, then it should have been done far more directly than it was done. 55Reading the submissions (to the extent that I have them) as a whole, it seems to me to be quite clear that each and every one of the paragraphs in question addresses the technical dispute between the two experts. That is done for the purpose of persuading the referee to discount Mr Rabone's expert opinion as to the cause of the low air flows, and to accept Mr Duggan's instead. 56Against that background, whilst the referee's comment at R993 may be technically inaccurate, it appears to me to be substantially correct. Presumably, Mr Rabone gave evidence as to the cost of replacing the units. Whilst his opinion, that the exercise required the replacement of two ducts in 50 per cent of the apartments, may appear to be somewhat thinly supported on the material to which I was taken, it has to be recalled that the experts agreed that this defect affected the majority of the apartments. 57In those circumstances, fastening on an approach which said that repair work was necessary in 50 per cent could hardly be said to be excessive. Further, presumably, Mr Rabone said why it was that the repair necessitated the replacement of the undersized flexible ducting. 58In circumstances where there was no direct challenge in submissions to Mr Rabone's costing, as opposed to his opinion on causation, I do not think that the referee erred when, having accepted Mr Rabone's evidence as to cause, he accepted also his effectively consequential evidence as to costing. I repeat that Mr Duggan put forward no reasoned or detailed criticism of Mr Rabone's costing. The referee in fact referred to this at R993. 59I accept, as Mr Goldstein said, that the issues were flagged both in the statement of findings of fact and law for which his client contended, that had been submitted to the referee after the evidence was completed, and in his client's written submissions. But the way in which those matters were flagged is such that, in my view, the practical approach taken by the referee was entirely appropriate. 60In an ideal world, it might have been preferable for the referee to extend his report beyond the 184 pages that it occupies already. In the practical world, it seems to me, he dealt with the dispute that the parties submitted to him and, both as to cause and as to quantum, did so in a way that decided the essential issues they had posed for him. 61It follows in my view that the two challenges advanced to the adoption of the report fail and that, with the agreed corrections, the report should be adopted.

Interest 62That leaves the question of interest and the question of costs. It is I think common ground that the question of costs cannot be dealt with at present. For reasons that were not quite clear to me, the defendants suggested that I should deal with interest at a later stage. I do not agree. 63The defendants referred to evidence that the hearing of the proceedings had been unduly delayed. The evidence included reference to a mediation that, for reasons I cannot fathom, dragged on over a period of some five and a half years. It referred also to discrepancies between the Reserve Bank (RBA) cash rate and the interest rate from time to time applicable under UCPR r 36.7. 64As to the latter point: it is hardly surprising that there is a discrepancy between the RBA cash rate and the prescribed rate of interest, because the prescribed rate of interest takes the RBA cash rate and adds a margin. 65Mr Goldstein referred to the judgment of Slattery J in Lovick & Son Developments Pty Ltd v Doppstadt Australia Pty Ltd (No 3) [2013] NSWSC 135. His Honour concluded that the court did have power to vary either the rate of interest or the time at which it should be allowed, in respect of prejudgment interest. However, he said, the circumstances in which that might be done were relatively limited. First, his Honour noted at [11], interest is not refused merely for the purpose of penalising delay, and mere delay is not usually a basis for refusing an award of interest. The governing principle is that the plaintiff has been out of its money and the defendant has had the use of that money. However, his Honour said (again at [11]), protracted and unreasonable delay, coupled with significant differences between court rates and prevailing commercial rates, might justify some reduction either in rate or in time. That was to be measured by reference to injustice to the defendant. I set out [11] of his Honour's reasons: [11] The principles governing the effect of a plaintiff's procedural delays in litigation on the Court's exercise of its discretion to award Civil Procedure Act s 100 interest are well established. An award of interest should not be refused merely for the purpose of penalising delay: Bennett v Jones [1977] 2 NSWLR 355. The purpose of the provision is to compensate the plaintiff for being out of its money: MBP (SA) Pty Limited v Gogic (1991) 171 CLR 657 at 5663, and Grincelis v House (2000) 201 CLR 321 at [16]. Mere delay in bringing or prosecuting proceedings will not usually provide a compelling basis for refusing an award of interest, because the plaintiff has still been out of the plaintiff's money; but protracted and unreasonable delay, especially where significant differences exist between Court interest rates and prevailing commercial rates of interest, may justify a discretionary reduction either in the rate of interest or in the period over which interest is awarded: Clark v Foodland Stores Pty Ltd [1993] VR 382 at 389, 394, 396, 398 and ICT Pty Ltd v Sea Containers Limited [2006] NSWSC 1280 at [14]-[19]. But the question is one of injustice to the defendant. Unreasonable delay, and amounts of interest at a high rate (in excess of commercial rates) "may mean that the defendant is unjustly left as the source of the plaintiff's investment income". Kalls Enterprises Pty Limited (in liquidation) and Ors v Baloglow & Anor (No 3) [2007] NSWCA 298. Thus, in some limited circumstances an adjustment to the rate of interest or to the period over which the interest accrues is permissible. 66In this case, there is no evidence that the delay was unreasonable. As I have said, a significant part of the delay appears to have been caused by the parties' meandering attempts at mediation over a period of some five and a half years. That delay cannot be ascribed solely to the Owners Corporation. 67More significantly, although the evidence shows (as, for the reasons I have given, one would expect) that there is a difference between the court rate and the RBA cash rate, it does not show that there is any difference, let alone significant, between the court rate and prevailing commercial rates. There is no evidence to suggest that if interest is allowed in full, either of the defendants would become in effect the source of the Owners Corporation's investment income. 68In those circumstances, bearing in mind as I have said the predominant compensatory function of interest - to ensure that the plaintiff does not suffer further loss by being kept out of its money - principle dictates that interest should be allowed at the rate prevailing under the rules from time to time, in respect of all moneys that the Owners Corporation has expended (to the extent that the referee has found) up until judgment.

Orders 69That leaves the question of costs. As I have said, it is inappropriate to deal with that. The only orders that I make are these:

1. I make an order in accordance with prayer one of the notice of motion filed for the plaintiff on 7 February 2014.
2. I direct the parties within seven days to bring in a form of order consistent with these reasons setting out the amount for which the plaintiff should have judgment.
3. I stand the question of costs over for directions on either next Friday or the following Friday. And that will be in the list.

[Counsel addressed.] 70ADJOURNED TO FRIDAY 28 MARCH 2014 FOR DIRECTIONS

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: 29 April 2014