The Owners Strata Plan No 66375 v Suncorp Metway Insurance Ltd

Introduction

1. The plaintiff (the Owners Corporation) is the Owners Corporation in respect of a mixed residential and commercial strata development in Layton Street, Camperdown known as "The Grace". The development, which was constructed between 2000 and 2001, involved the conversion of a warehouse complex built in 1928 that was owned by the third defendant, Mr David King, and the fourth defendant, Mrs Gwendoline King, Mr King's mother. The builder of the development was the second defendant, Beach Constructions Pty Ltd (Beach), which is now in liquidation. The first defendant, Suncorp Metway Insurance Pty Ltd (Suncorp), provided home warranty insurance pursuant to Part 6 of the Home Building Act 1989 (NSW) (the HBA) in respect of the building works. The fifth defendant, Meridian Estates Pty Ltd (Meridian), was the developer of the development. Its sole directors were Mr King and Mrs King. Meridian was joined in the proceedings as the fifth defendant on 3 March 2017 in connection with a cross-claim filed on that day seeking rectification of the relevant construction contract in the event that the court found that, on its true construction, the Kings were parties to that agreement. No other relief is sought against Meridian.
2. In these proceedings, the Owners Corporation makes claims for various defects that exist with the development. There was originally a dispute between the Owners Corporation and Suncorp concerning Suncorp's liability under the insurance policy issued by it for a number of the defects that are the subject of the Owners Corporation's claim. That dispute was resolved during the course of the hearing, but on terms which mean that Suncorp's actual liability depends on findings the court makes in respect of a number of the defects.
3. Two broad questions remain. The first is whether the Kings are themselves liable for the defects that are the subject of the Owners Corporation's claim on the basis that they were "developers" within the meaning of s 3A of the HBA. The second is whether, assuming the Kings are liable for the defects as developers, their liability extends to certain defects that are the subject of the claim. As I have said, the determination of that question will also have the effect of fixing the amount for which Suncorp is liable.

Background

1. Section 3A of the HBA so far as material provided at the relevant time: (1) For the purposes of this Act, an individual, a partnership or a corporation on whose behalf residential building work is done in the circumstances set out in subsection (2) is a developer who does the work. (2) The circumstances are: (a) the residential building work is done in connection with an existing or proposed dwelling in a building or residential development where 4 or more of the existing or proposed dwellings are or will be owned by the individual, partnership or corporation, or (b) the residential building work is done in connection with an existing or proposed retirement village or accommodation specially designed for the disabled where all of the residential units are or will be owned by the individual, partnership or corporation.
2. It is common ground that the issue raised by this section is whether the Kings were persons "on whose behalf" the building work was done. In the circumstances of this case, the answer to that question turns on whether the Kings were a party to the relevant building contract with Beach: see Ace Woollahra Pty Ltd v The Owners Strata Plan 61424 (2010) 77 NSWLR 613; [2010] NSWCA 101; Baron Corp Pty Ltd v Owners of Strata Plan 69567 [2013] NSWCA 238.
3. The plans for the development were prepared by Bonus Architects Pty Limited (Bonus), the director of which was Mr Geoffrey Bonus, who is a registered architect.
4. On or about 21 December 1998, Mr Bonus submitted an application for development approval on behalf of Meridian to South Sydney City Council. That approval was granted by the Council in Meridian's name on 8 April 1999.
5. Sometime in August or September 1999, Meridian and the Kings signed a Development Agreement by which Meridian agreed to undertake the development in exchange for a fee. Although various drafts of the agreement were in evidence, a signed version was not. It is common ground, however, that it was executed.
6. Clause 7 of the Development Agreement provides: POWER OF ATTORNEY The Owner [the Kings] hereby appoints the Developer [Meridian], and each director of the Developer as their attorney for the purpose of executing all such documents and entering into all such transactions as may be necessary for the Developer to undertake the Development and perform the Contracted Services.
7. Clause 8(4) of the Development Agreement provides: The Owner acknowledges that the Developer is not a licensed builder and will enter into a building contract on behalf of the Owner with a licensed builder.
8. On 18 October 1999, Bonus issued a tender for the construction of the development naming the principal as Meridian. The conditions of tender stated that the tender documents comprised the following: - These Conditions of Tendering. - Tender Form. - General Conditions of Contract. - Special conditions of contract. - Appendix to General Conditions of Contract, precompleted - Specifications. - Drawings. The General Conditions of Contract were those issued by Standards Australia known as AS 2124-1992 (AS2124).
9. Clause 6 of AS2124 relevantly provided: 6.1 Contract in Absence of Formal Instrument of Agreement Unless a Formal Instrument of Agreement is executed by the parties, the agreement in writing between the parties for the execution of the work under the Contract, including documents or parts of documents to which reference may properly be made to ascertain the rights and obligations of the parties, shall evidence the Contract. 6.2 Formal Instrument of Agreement If the conditions of tender require a Formal Instrument of Agreement, the Principal shall prepare in duplicate a Formal Instrument of Agreement and shall, within 28 days after the Date of Acceptance of Tender, forward it to the Contractor with a request that it be executed. Within 14 days after being requested in writing by the Principal so to do, the Contractor shall execute both copies of the Formal Instrument of Agreement in the manner directed in writing by the Principal and return them to the Principal. Within 14 days after receipt from the Contractor of the two copies of the Formal Instrument of Agreement duly executed by the Contractor, the Principal shall execute both copies, have them stamped (unless they are exempt from duty) and forward one copy to the Contractor.
10. Clause 8.1 of AS2124 relevantly provided: The several documents forming the Contract are to be taken as mutually explanatory of one another. If either party discovers any ambiguity or discrepancy in any document prepared for the purpose of executing the work under the Contract, that party shall notify the Superintendent in writing of the ambiguity or discrepancy. In the event of an ambiguity or discrepancy being discovered and brought to the attention of the Superintendent, or discovered by the Superintendent, the Superintendent shall direct the Contractor as to the interpretation to be followed by the Contractor in carrying out the work.
11. The conditions of tender under the heading "6 PROCEDURES AFTER TENDER PERIOD" included the following item: Formal instrument of agreement: Required/Not required. It is apparent that this item was to be completed by striking out the word "Required" or the words "Not required". However, that was not done.
12. In relation to acceptance, the conditions of tender stated: Acceptance: A tender is not accepted until notice in writing of acceptance is - handed to the tenderer; or - sent by prepaid post to, or left at, the address for service of notices stated in the Tender Form; or - transmitted by facsimile to the tenderer's facsimile number.
13. By two letters, one dated 9 February 2000 and the other dated 10 February 2000, Mr Paul Hills, a director of Beach, submitted a tender for the building works on behalf of Beach. The tender named Meridian as principal and provided for a tender price of $10,428,125. Both letters stated: If our tender is acceptable we would wish to discuss and negotiate the Conditions of Contract.
14. The tender also stated under the heading "Clarifications and Qualifications": 23. We have assumed the tender documents conform in all respects to the Authorities and BCA [Building Code of Australia] requirements. 24 Our tender excludes any responsibility for design and or documentation.
15. Beach's tender was accepted by Bonus on behalf of Meridian on 21 February 2000. A revised letter of acceptance was issued on 15 March 2000. The letter of acceptance sets out the contract details including the contract price, the amounts allowed for provisional sum items and the documents comprising the contract. Paragraph 12 (which did not change) provided: Order of Precedence for contract documents shall be as follows: Firstly, this letter of Acceptance 15 March 2000. Secondly, Beach Construction Pty Ltd letter of 10 February 2000 with attachments Thirdly, AS2124 contract with annexures Fourthly, the remainder of the contract documents in the order as provided elsewhere in the contract documents. No order of precedence is provided in the contract documents for the specifications compared with the plans.
16. Following initial acceptance of the tender, there were regular site meetings. Those site meetings were attended by, among others, representatives of Beach and Bonus. They were also attended by Mr Michael Kirkby from Lonsdale Pty Ltd, the project manager. Mr Kirkby prepared minutes of the meetings which were circulated to the participants. Mr John Fredricks, who was one of the persons who attended the meetings as a representative of Beach, gave evidence that it was the practice to confirm the minutes of a meeting at the following meeting and to note any corrections to the minutes at that time.
17. The first site meeting occurred on 23 February 2000. The minutes of that meeting record: Bonus to prepare contract documents with a view to issuing them prior to the end of the week.
18. Those minutes also record: Bonus advised that John stringer [sic] & Assoc would be assessing the progress claims on behalf of the Commonwealth Bank who are funding the project. Bonus to discuss the method of assessment with John Stringer and arrange for a meeting between him and Beach to agree the method by which Progress claims will be processed.
19. Despite what is recorded in the minutes, Bonus did not issue the contract documents by the end of the following week. There were issues with the terms of the acceptance of the tender. Those issues appear to have been the subject of discussion between Mr Bonus and Mr Hills and, on 6 April 2000, Bonus sent by fax a further revised draft letter of acceptance dated 5 April 2000 to Mr Hills. Mr Hills replied to that fax on 10 April 2000 proposing two minor amendments to the revised letter of acceptance. Shortly after receiving that fax, Mr Bonus provided the final letter of acceptance, still dated 5 April 2000, incorporating Mr Hills' amendments.
20. The question of preparation of the contract documents was a recurring topic in subsequent minutes. Relevantly, the Minutes of Site Meeting No 5 held on 18 April 2000 record: Bonus to prepare the contract documents for executing. Later. Awaiting confirmation from lawyers as to Principal in the contract. A copy of those minutes and subsequent ones were distributed to the Kings.
21. The Minutes of Site Meeting No 6 held on 2 May 2000 state that "GB [presumably Mr Bonus] advised that he would be issuing the contract documents for execution tomorrow". That did not happen and the minutes of subsequent site meetings make reference to delays in preparation of the contract. They also state that finalisation of the contract was something that needed to occur as soon as possible so that Mr Stringer could be provided with a copy "to enable him to provide his initial assessment to the bank to allow funding to commence". In fact, it appears from the minutes that the contract was not issued until shortly before 23 May 2000. The Minutes of Meeting No 9 held on that day record: 9.22 Contract documents arrived at Beach's office on 25/2/00. Beach to review these documents and execute for issuing back to the client. 9.23 As soon as the contract documents are in place, John Stringer should be issued with a copy to enable him to provide his initial assessment to the bank to allow funding to commence. These documents should be issued to him as soon as possible. The reference to "25/2/00" is almost certainly an error.
22. Mr Hills gives evidence that, at about that time, he received two copies of the contract. He identifies those contracts in his affidavit. They consisted of the documents that formed the tender and its acceptance and included a Formal Instrument of Agreement. That document stated the Principal as "David & Gwen King/Meridian Estates P/L ACN 003 922 012", although other documents included in the contractual material (that formed part of the tender) continued to show the principal as Meridian. The names of the Principal were written in the Formal Instrument of Agreement in hand. It is not known by whom.
23. It appears from the minutes of site meetings after the one held on 23 May 2000 that Mr Hills raised some issues with the contracts that were sent to him which required some time to sort out. The minutes suggest that Bonus issued a revised form of the contract to include those changes. However, whether that happened and what form the changes took is not clear from the evidence.
24. At some time, Mr Hills signed each copy of the Formal Instrument of Agreement on behalf of "the Contractor" and initialled each page constituting the contract, although he has no recollection of doing so. The contracts were also initialled by someone else, but Mr Hills was unable to identify by whom. The Formal Instrument of Agreement was dated 19 May 2000, although it appears from the minutes that Mr Hills did not sign it until shortly before 20 June 2000. Mr Hills says that in accordance with his normal practice he believes that he sent both copies of the contract to Bonus to be signed by the Principal. The copies of the contract that were attached to Mr Hills' affidavit were the copies that had been signed and initialled by him. The Minutes of Meeting No 13 held on 20 June 2000 record "The contract has been forwarded to David King for execution" and continued to record the fact that a copy needed to be sent to Mr Stringer once the contract had been signed. In the meantime, it is apparent from the minutes that work on the project had commenced and was progressing. A progress payment of $285,071.00 was made to Beach on 15 June 2000 from an account in the name of King Furniture Australia Pty Ltd.
25. The Minutes of Site Meeting No 15 held on 4 July 2000 record "Bonus advised that the executed contract will be picked up from David & Gwen King this week." The minutes of the following meeting held on 11 July 2000 record: 16.26 It was confirmed at the meeting that the contract had been executed by David and Gwen King. 16.27 Bonus confirmed that one set of the executed contract documents was being sent to John Stringers office today to enable him to provide an initial assessment to the bank to allow debt funding to commence. There were two representatives at the meeting from Bonus. They did not include Mr Bonus.
26. On one copy of the 11 July 2000 minutes someone has written the following next to para 16.26: HAVE NOT REC'D SIGN COPY. On another set of the minutes someone has written next to para 16.26 the word "NOTED" and next to para 16.27 the words "COPY NOT REC'D BY BC [presumably, Beach]".
27. There are no further references in the minutes to the contract. However, the Minutes of Site Meeting No 17 held on 18 July 2000 do record: John Stringer attended the site at the time of the site meeting and an agreement was reached as to the procedure for future progress claims.
28. There was no copy of the contract, and in particular no copy of the Formal Instrument of Agreement, in evidence that had been signed by Meridian or by the Kings. Neither Mr King nor Mrs King gave evidence.

The Owners Corporation's case

1. The Owners Corporation puts its case in two ways. First, it submits that the court should infer from the evidence that the Kings signed the Formal Instrument of Agreement that had been signed by Mr Hills and, by doing so, became parties to the contract. In the alternative, they submit that Meridian became a party to the contract as their agent.
2. The Kings raised one other argument in this context. They submitted that, even if the court found that they had signed the contract that had been executed by Mr Hills, that contract should be rectified to exclude them as parties.

Were the Kings parties to the contract?

1. The Owners Corporation's primary case in relation to this issue has three steps. First, it submits that the court should infer from the evidence that the contract with which the site minutes are concerned is the contract that was signed and initialled by Mr Hills. Second, it submits that the court should conclude from the minutes that the Kings signed that contract. Third, it submits that by signing the contract, the Kings became personally bound by it. Those inferences are said to be supported by two additional considerations. One is the fact that neither of the Kings gave evidence. The other is that it is inconceivable that the parties would have proceeded with the project absent a signed contract.
2. I am prepared to accept that the contract with which the minutes are concerned is the contract two copies of which were signed and initialled by Mr Hills. The minutes describe the preparation of the contract and the sending of that contract to Beach to be signed. The procedure described in the minutes is consistent with the procedure set out in cl 6.2 of AS2124 where a Formal Instrument of Agreement is required. I accept Mr Hills' evidence that he signed two copies of the contract which included a Formal Instrument of Agreement. It is difficult to imagine that what was being discussed at the meetings was some other contract.
3. However, I do not accept the second step on which the Owners Corporation's submission depends.
4. The Owners Corporation submits that the minutes of the site meetings are business records that may be admitted as evidence of the facts asserted in them under s 69 of the Evidence Act 1995 (NSW). That section relevantly provides: (1) This section applies to a document that: (a) either: (i) is or forms part of the records belonging to or kept by a person, body or organisation in the course of, or for the purposes of, a business, or (ii) at any time was or formed part of such a record, and (b) contains a previous representation made or recorded in the document in the course of, or for the purposes of, the business. (2) The hearsay rule does not apply to the document (so far as it contains the representation) if the representation was made: (a) by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact, or (b) on the basis of information directly or indirectly supplied by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact. … (5) For the purposes of this section, a person is taken to have had personal knowledge of a fact if the person's knowledge of the fact was or might reasonably be supposed to have been based on what the person saw, heard or otherwise perceived (other than a previous representation made by a person about the fact).
5. In this case, the minutes were prepared by Mr Kirkby from Lonsdale Pty Ltd and it appears that the minutes were kept in the course of the business conducted by Lonsdale and were made for the purposes of that business. However, the representation must be made "by a person who had or might reasonably be supposed to have had personal knowledge of the asserted fact" which is "based on what the person saw, heard or otherwise perceived (other than a previous representation made by a person about the fact)". The critical representations fall into two categories. First, there are those concerned with the progress in the signing of the contract by the Kings and, in particular, the representation in the minutes of the meeting held on 11 July 2000 that "the contract had been executed by David and Gwen King". Second, there are those concerned with the need to provide a copy of the signed contract to Mr Stringer so that he could complete his initial assessment to the bank to allow funding to commence. The statement to that effect at the meeting on 23 May 2000 and the statement in the minutes of the meeting held on 11 July 2000 that "one set of the executed contract documents was being sent to John Stringers office today" are examples.
6. Although it is not clear from the minutes, it may be inferred that both sets of representations were made by representatives of Bonus who attended the meetings. However, it is far from clear that any of the representatives from Bonus had or could reasonably be supposed to have had personal knowledge of any of the facts asserted in the minutes concerning execution of the contract by the Kings or the requirements of the Commonwealth Bank before it would advance money under the facility. There is no reason to believe that anyone from Bonus saw the Kings execute the contract. There is no suggestion that anyone from Bonus saw a copy of the executed contract. Similarly, there is no reason to believe that anyone from Bonus had personal knowledge of the circumstances under which the Commonwealth Bank was or was not willing to advance money.
7. Even if those conclusions are wrong, in my opinion, the minutes are not sufficient evidence to prove that the Kings actually did sign the contract in their own capacities. If the minutes are admissible as evidence of the facts stated in them, they provide some evidence that the Kings executed the contract, since that is what they say. However, the strength of that evidence is undermined by the fact that it is not clear from the minutes precisely who made the relevant statements to the meetings and the basis on which they did so. Predictions in the minutes concerning when the contract would be prepared and distributed by Bonus, which were made by Bonus, were on occasions proved by subsequent events to be unreliable. Moreover, the minutes do not record that a signed copy of the contract was returned to Beach, as might have been expected if both copies had been signed by the Kings. Nor do the minutes record that Mr Stringer had received a signed copy, as might have been expected given what was said in the previous minutes concerning the significance of that matter.
8. The minutes of the meeting on 18 July 2000 do record that Mr Stringer attended the site that day and that an agreement was reached as to the procedure for future progress claims. That is some evidence that Mr Stringer had been provided with a signed copy of the contract as stated would happen in the earlier minutes, and the absence of anything more in the minutes on the subject might be explained on the basis that once Mr Stringer had been provided with a copy of the signed contract, it was no longer necessary to address the issue at the meetings. However, it might equally be said that it was no longer necessary to address the issue at the meetings once Beach had returned the contracts to Bonus, but they continued to do so. Moreover, the fact that the minutes said nothing more about the contract could be explained by the fact that the bank realised that a contract was already in existence and nothing more needed to be done.
9. The Owners Corporation submits that its contention that the minutes of the meeting on 11 July 2000 are accurate when they state that the Kings had signed the contract is supported by the fact that the minutes were distributed to the Kings and there is no evidence that they sought to correct them. Equally, however, there is no evidence that the Kings read the minutes or, if they did read them, that by the time of the following meeting they thought that it was necessary to correct them.
10. The Owners Corporation also submits that the statements in the minutes concerning the need to sign the contract in order for the bank to provide funding are corroborated by the fact that King Furniture Australia Pty Ltd made a progress payment of $285,071.00 to Beach on 15 June 2000. But that fact does not establish that the Commonwealth Bank advanced no funds prior to 18 July 2000. It is also equivocal because it is equally consistent with the possibility that the funding provided by the bank did not cover the full project costs.
11. In my opinion, the other points made by the Owners Corporation do not advance the matter. The Kings were available to give evidence. In accordance with the principles stated in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, it may be inferred from the fact that they did not do so that their evidence would not have assisted their case. However, in my opinion, the only inference that can reasonably be drawn from their failure to give evidence is that they have no recollection whether they signed the contract signed by Mr Hills or not and why King Furniture Australia Pty Ltd made the progress payment on 15 June 2000. Given that the relevant events occurred approximately 17 years ago, that is not surprising.
12. The Owners Corporation's other point does not take the matter further either. In my opinion, a contract came into existence at the time Bonus, on behalf of Meridian, accepted Beach's tender in terms that had been agreed between Bonus and Beach. The acceptance clearly sets out the terms of the contract and those terms had been negotiated between Meridian, or Bonus on behalf of Meridian, and Beach as contemplated by Beach's tender. The General Conditions of Contract (AS2124) specifically catered for the possibility that there would not be a Formal Instrument of Agreement and the Conditions of Tender did not state one way or the other whether a Formal Instrument of Agreement was necessary. Following acceptance of the tender, work started on the project. That is consistent with a contract coming into existence at that time. The Owners Corporation does not point to any differences of substance (apart from the addition of the Kings as parties) between the contract constituted by acceptance of the tender and the contract signed by Mr Hills. There was no need to sign a formal contract that included a Formal Instrument of Agreement.
13. Against the evidence relied on by the Owners Corporation is the fact that no contract signed by the Kings has been found. The explanation of that, of course, could be that both copies of the contract that the minutes suggest that they signed have been lost. To some extent that conclusion is supported by the fact that the executed copy of the Development Agreement has been lost. However, it still seems unlikely that both copies of the contract have been lost. Two copies of the contract signed by Beach are in evidence. No-one appears to have paid close attention to where those copies came from, although I was informed by Mr Tom Davie, who appeared for the Owners Corporation, during the course of closing submissions that one copy came from the discovery of the Kings and was provided on a CD ROM together with other discovered documents. The other copy was obtained from Beach. No-one appears to have made enquiries concerning the originals. It might be inferred that Mr Hills made a copy of one of the contracts he signed before sending it to Bonus for his records. But it is difficult to understand why the Kings would have made a copy of the contract before they signed it; and if the copy they discovered was taken from the original, that is strong evidence that the copies that were sent to them were never executed.
14. In my opinion, the parties' subsequent conduct is also relevant. That conduct can be taken into account in determining whether the Kings signed the contract and were parties to it: Australian Broadcasting Corp v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 550 per Gleeson CJ; Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551 at 14,569-70; [1995] NSWCA 166 per Kirby P; Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at [25]; [2001] NSWCA 61 per Heydon JA; Filadelfia Projects Pty Ltd v Entirity Business Services Pty Ltd (No 2) [2011] NSWSC 116 at [38]. That conduct was consistent with the contracting party being Meridian and not the Kings. So, for example, from the time it is said that the Kings signed the contract, Beach issued invoices addressed to Meridian, Bonus issued certificates of payment naming Meridian as "The Proprietor" and the invoices were paid by Meridian from an account in its name. In addition, on 16 November 2001, an occupation certificate was issued in the name of Meridian.
15. The onus was on the Owners Corporation to establish that the Kings signed a contract in the form that had been signed by Mr Hills. Having regard to the matters I have referred to, I am not satisfied that they have discharged that onus.
16. That leaves the Owners Corporation's alternative case based on agency. The case that Meridian entered into the contract as agent for the Kings is based on cls 7 and 8(4) of the Development Agreement. The Owners Corporation submits that Meridian entered into the contract on their behalf as disclosed principals. It also takes issue with the Kings' submission that Meridian could not have entered into the contract as their agent because cl 9.1 of AS2124 prevented assignment by either party of the contract without the prior written approval of the other.
17. In my opinion, the Owners Corporation's alternative case must fail for two reasons.
18. First, the Development Agreement did not provide that Meridian entered into the contract with Beach as the Kings' agent. By cl 7, the Kings appointed Meridian as their attorney for the purposes of entering into transactions as may be necessary to perform the "Contracted Services". But that does not mean that everything Meridian did in its own name in relation to the project it did as attorney for the Kings. Indeed, it is to be expected that if Meridian was entering into the contract exercising the power of attorney granted to it, then the contract would have said so specifically.
19. By cl 8, Meridian agreed to engage a builder "on behalf of" the Kings. Although the words "on behalf of" would include an agency relationship, they are broader than that and can have many meanings: Ace Woollahra Pty Ltd v The Owners-Strata Plan 61424 (2010) 77 NSWLR 613; [2010] NSWCA 101 per Sackville AJA at [50], with whom Tobias and McColl JJA agreed; R v Toohey; Ex parte Attorney-General (NT) (1980) 145 CLR 374 at 386; [1980] HCA 2 per Stephen, Mason, Murphy and Aickin JJ. In context, the words simply mean that Meridian would engage a licensed builder for the Kings' benefit. If the parties had intended that Meridian would engage a builder as agent for the Kings it is to be expected, for example, that the tender documents would have said so. They did not.
20. Second, if Meridian was acting as the Kings' agent, as between Meridian and Beach, that agency was not disclosed. An undisclosed principal may sue and be sued on a contract made by the agent on the principal's behalf if the agent had actual authority to enter into the contract on behalf of the principal and intended to do so: Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 at 207. However, an exception to that principle exists where the relevant contract contains a clause prohibiting assignment on the basis that the principle of undisclosed principal is sufficiently analogous to an assignment to fall within the prohibition: Andrews v Nominal Defendant [1968] 3 NSWR 686 at 695 per Asprey JA (with whom Sugerman AP agreed and Walsh JA agreed on the point, although dissenting in the result); The Owners of Strata Plan 69567 v Baseline Constructions Pty Ltd (in external administration) [2013] NSWSC 409 at [84] per Stevenson J (reversed on another point in Baron Corp Pty Ltd v Owners of Strata Plan 69567 [2013] NSWCA 238).
21. The Owners Corporation submits that the decision in Andrews should be distinguished from the present case because, in the present case, there was no prohibition on assignment, merely a requirement to obtain consent. I do not accept that submission. The general principle that an assignment in breach of a contractual restriction is ineffective applies equally where the restriction prevents assignment without consent: see Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85; Minister for Land & Water Conservation v NTL Australia Pty Ltd (2002) 11 BPR 20,143; [2002] NSWCA 149 at [8] per Mason P, [19]-[22] per Sheller JA (reversed on another point in Broadcast Australia Pty Ltd v Minister Assisting the Minister for Natural Resources (Lands) 221 CLR 178); [2004] HCA 4. By analogy, the same principle must apply where an agent purports to enter into a contract on behalf of another without the consent of the other contracting party.

Rectification

1. Having regard to the conclusions I have reached, it is not necessary to consider the claim for rectification. However, had it been necessary to do so, I would have concluded that the claim should fail.
2. As I have said, the claim for rectification was brought by Meridian and the Kings. They submitted that it is to be inferred from the request for tender, the tender and the acceptance of the tender that it was the common intention of Meridian and Beach that they would be the only contracting parties. How that can be the case when subsequently the Kings were named as parties to the contract and, on the relevant assumption, Beach, Meridian and presumably the Kings signed the contract, was not explained. It was never put to Mr Hills that, despite the fact that he signed the contract, he never intended the Kings to be parties. The Kings were not called to explain why they signed a contract in which they were named as parties but nevertheless believed that they were not.
3. It is true, as the Kings and Meridian submit, that the court is not required to accept the evidence of the parties concerning their intentions and what matters is their intentions objectively ascertained: see Simic v New South Wales Land and Housing Corporation (2016) 339 ALR 200; [2016] HCA 47 at [42]ff per Kiefel J. But here, on the relevant assumption, the parties signed a contract naming the Kings as parties. Whatever they may have intended in the past, the question is what they intended at the time they signed the contract naming the Kings as parties. In the absence of some explanation, the parties must have intended to include the Kings as parties regardless of the position they had taken previously on that matter.

The defects case

1. The issue in relation to the defects is whether the loss and damage claimed by the Owners Corporation in respect of a number of defects resulted from breaches of the statutory warranties implied by s 18B of the HBA. Section 18B of the HBA provided: The following warranties by the holder of a licence, or a person required to hold a licence before entering into a contract, are implied in every contract to do residential building work: (a) a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract, (b) a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new, (c) a warranty that the work will be done in accordance with, and will comply with, this or any other law, (d) a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time, (e) a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling, (f) a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the licence or person required to hold a licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder's or person's skill and judgment.
2. Section 18C relevantly provided: A person who is the immediate successor in title to … a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the … developer were required to hold a licence and had done the work under a contract with that successor in title to do the work.
3. Although s 18C does not expressly say so, it is implicit in the section that the notional contract is a contract for the carrying out of the same work as the contract into which the statutory warranties are implied by s 18B. The legislature could not have intended the notional contract to have a broader or narrower scope than the contract under which the work was actually performed. Consequently, the effect of s 18C is to make the Kings, if they were developers, liable to the Owners Corporation for breaches of the statutory warranties to the extent that Beach was liable to them for breaches of those warranties.
4. Evidence concerning the defects was given by a number of experts jointly retained by the parties. Evidence in relation to the fire and safety defects was given by Mr Stephen Grubits. Evidence in relation to acoustic defects was given by Mr Matthew Ottley. Evidence in relation to the other defects was given by Mr Paul Ratcliff. Evidence concerning the costs of rectifying the defects was given by Mr Tony Makin, a quantity surveyor.
5. The defects in issue fall into a number of categories: 1. Fire and safety defects; 2. Acoustic defects; 3. General building defects; 4. Waterproofing defects with the bathrooms; 5. Waterproofing defects with the balconies.
6. In addition, the Kings take issue with Mr Makin's quantification of the costs of rectifying defects to the extent that his estimates include provisional allowances and a contingency sum. They also take issue with the amount allowed by Mr Makin for preliminaries and supervision.

Fire and safety defects

1. The fire and safety defects still in dispute are the following: Defect Cost of rectification Lack of hand rails to stairs to common areas leading to some units $1,481 Lack of thermal detectors to car park and kitchens in retail units $49,648 Lack of sprinklers in voids above bathrooms, ensuites, laundries and sub-floor voids $323,338

1. Relying on the reports of Mr Grubits, the Owners Corporation submits that each of these defects involves a breach of the warranty implied by s 18B(c) (that the work will comply with any law) because the relevant work did not comply with the Building Code of Australia 1996 (BCA). That breach of the law arises because the Development Approval in respect of the project imposed as condition (53) on the approval that "all relevant sections of the BCA shall be complied with". Section 76A(1) of the Environmental Planning and Assessment Act 1979 (NSW) (the EPA Act) relevantly provided: If an environmental planning instrument provides that specified development may not be carried out except with development consent, a person must not carry the development out on land to which the provision applies unless: (a) … (b) the development is carried out in accordance with the consent and the instrument. The result is that a failure to comply with the relevant provisions of the BCA is a breach of s 76A(1) of the EPA Act.
2. Mr Grubits expresses the unchallenged opinion that each of the identified breaches involved a failure in design - that is, the relevant items were not shown in the drawings or specifications that formed part of the contract.
3. In my opinion, the relevant defects do not involve a breach by Beach (or the Kings) of the warranty implied by s 18B(c) of the HBA. That warranty is not a warranty that the project will comply with the law. It is a warranty that "the work will be done in accordance with … the law". The "work" is the work done under the contract into which the warranties are implied. In this case, Beach was not responsible for the relevant design. Its obligation under the contract was to construct the development in accordance with the plans and specifications that formed part of the contract. The warranty was not a warranty that those plans and specifications complied with the law but a warranty that the work done in accordance with the plans and specifications complied with the law. That warranty was not breached.

Acoustic defects

1. The acoustic defects all consisted of the failure to wrap certain pipes. The total cost of rectifying those defects is $4,595.
2. The same considerations arise in relation to these defects as arise in relation to the fire and safety defects. The evidence in relation to the issue is scant. Mr Ottley's report does not clearly state whether the wrapping was specified in the contractual drawings or not. However, it was for the Owners Corporation to prove a breach of the relevant warranty. In order to do that, it needed to establish that the question whether the pipes should be wrapped or not was a question left to the builder by the contract. It has not done that. Consequently, in my opinion, this claim must fail.

General building defects

1. Three general building defects remain in dispute. One is the absence of seals on doors to the goods lifts. The cost of rectifying that defect is $19,558. The second is the absence of heat detectors in all residential units. The cost of rectifying that defect is $33,955. Both those defects raise similar issues to the fire and safety defects. It appears to be common ground that the relevant items were not specified in the drawings or the specifications. The Owners Corporation does not specifically identify which warranty is said to be breached in relation to these defects, but again it appears to be the warranty implied by s 18B(c). For the reasons I have already given, in my opinion that warranty was not breached where the failure to comply with the BCA arises from the design rather than the actual building works.
2. The third general building defect relates to water damage around the perimeter of the building. The cost of rectifying that defect is $22,769. Mr Ratcliff expresses the opinion that the "primary cause of the water damage is a result of the barge capping not being installed so that it over-flashes the edge beam and the box gutters are not fitted with overflows". He also expresses the opinion that "The box gutter capping at the edge beam is poorly designed". Mr Ratcliff expresses the opinion that the omission of the overflows is a breach of the BCA. He points out that the overflows were specified in the specifications but were not included in the sectional drawing for the gutters.
3. It is apparent from Mr Ratcliff's evidence that there was a conflict between the specifications and the drawings. Under the terms of the contract, that conflict was to be resolved by the Superintendent. Until the conflict was resolved, the works could not be constructed in accordance with both the specifications and the drawings. The result is that Beach could not avoid a breach of the warranty implied by s 18B(a) until the conflict was resolved. Clause 8.1 of AS2124 provided a mechanism for resolving that conflict, which Beach did not use. Consequently, in my opinion, Beach, and therefore the Kings had they been developers, are liable for a breach of that warranty.

Waterproofing defects with the bathrooms

1. The evidence in relation to this defect from Mr Ratcliff, which I accept, is that the waterproofing membrane used by Beach was inappropriate to be used to waterproof the bathrooms in the development. The building is a timber framed structure and is therefore subject to greater movement stress than a building constructed out of concrete and masonry. According to Mr Ratcliff, the chosen membrane has low "in service extensibility (elongation)", particularly when exposed to detergent, which made it unsuitable for use in that environment. Instead, according to Mr Ratcliff, a membrane with greater elasticity should have been used.
2. In the tender documents Meridian had specified a suitable membrane. However, in its tender, Beach stated (in para 16 of the section headed "Clarifications and Qualifications") that "Our tender is inclusive of an alternative waterproof membrane to the amenities and internal terraces". That proposal was accepted by Meridian in its acceptance of Beach's tender. According to the Minutes of Site Meeting No 40 held on 30 January 2001, "It was agreed at the meeting that the specification for membranes as listed by Tremco [the company supplying the membranes] was acceptable to all parties".
3. Mr Ratcliff also gave evidence, based on observations carried out by Mr Pickering, that of the 25 out of 35 bathrooms inspected by Mr Pickering, 15 bathrooms have leaked in the past or were still leaking; and of the 39 out of the 54 ensuites inspected by Mr Pickering, 23 have leaked or were still leaking. Mr Ratcliff also gave evidence that he undertook destructive testing and observation of two bathrooms and found: a) The membrane film thickness is inadequate. b) Lack of fillet/bond breaker joints at the wall to floor junctions. … e) Water stop angles at the doors to the wet areas are not adequately fixed, allowing movement. This is resulting in splitting of the membrane at the underside of the angle and junction of the floor slab at the doors to the wet areas. f) The waterproofing applied to walls in shower enclosures was so thin it was indistinguishable. …
4. On the basis of those observations, Mr Ratcliff expressed the following conclusions: I have formed the opinion that there is a high probability that all bathrooms and ensuites will leak. This opinion is based on the inspection of Mr Pickering that found 60% of the bathrooms and 84% of the ensuites inspected are leaking or have leaked, the type of membrane used, the substrate type, and my own diagnostic investigation of the quality of the waterproofing installation which was found to be sub-standard.
5. Mr Ratcliff recommends the replacement of the membranes with a sheet-based membrane. According to the evidence of Mr Makin, the cost of that work is $711,669.
6. The Kings make two submissions in respect of this category of defect. The first is that the defects in the bathrooms are a defect in design for which they are not liable. The second is that the claim should be limited to those bathrooms which have been specifically found to be leaking. That approach is said to be consistent with the decision of Ward J in The Owners Strata Plan 62930 v Kell & Rigby Holdings Pty Ltd [2010] NSWSC 612, where her Honour said (at [166]): The Builder accepts that in the three bathrooms where testing was carried out … the evidence establishes that there was no correctly positioned waterstop. It is said (and I agree) that I cannot infer from this that any waterproofing work was incorrectly performed in other units. (The fact that the subcontractor defectively performed work in a small number of units does not warrant a conclusion that it did so everywhere else.)
7. I do not accept either of the Owners Corporation's submissions. Section 18B(b) of the HBA implied a warranty in the contract by Beach (and therefore by the Kings, if they were developers) that "all materials supplied by the holder or person will be good and suitable for the purpose for which they are used". In my opinion, the effect of this warranty is to place the obligation of selecting an appropriate membrane on Beach. Beach, in fact, took it upon itself to select the membrane (with the approval of Bonus). It was liable for a breach of warranty if the selected membrane was not suitable, which according to the evidence of Mr Ratcliff it was not.
8. As to the Kings' second point, contrary to their submission, Ward J is not to be understood as stating a principle of law in Kell & Rigby. The point made by her Honour is simply that on the facts of that case, she was not satisfied that it could be inferred from the evidence that the identified defect was present in all bathrooms, including those that had not been examined.
9. In the present case, the principal defect with the bathrooms and ensuites identified by Mr Ratcliff was with the selection of the waterproof membrane. The high likelihood is that that defect existed with all bathrooms and ensuites. It is clear from the contractual documents that Beach decided to select a different membrane from the one specified in the tender documents. It is highly unlikely that different membranes would have been laid in different bathrooms and ensuites.
10. Mr Ratcliff also expressed the view that the thickness of the membranes in the bathrooms he inspected was inadequate. That conclusion was based on the destructive testing of two bathrooms. I accept that that evidence provides an inadequate foundation for the conclusion that all bathrooms and ensuites suffered from the same defect. Although the two bathrooms were selected randomly, they could still have been exceptions. That conclusion is not altered by the fact that a substantial number of bathrooms and ensuites were or are subject to leaks. On Mr Ratcliff's evidence, those leaks could be explained by the choice of membrane rather than inadequate thickness.
11. The question remains whether the Owners Corporation is entitled to recover the costs of replacing the membranes in all bathrooms and ensuites or only those that have been the subject of leaks. In my opinion, it should be entitled to recover the costs of replacing all the membranes. The membranes in all bathrooms and ensuites breach the warranty implied by s 18B(b). A substantial number of the membranes have failed. Given the risks of failure, it is reasonable for the Owners Corporation to replace all membranes.

Waterproofing defects with the balconies

1. Mr Ratcliff identifies two problems with the waterproofing of the balconies. The first is the failure to install a fillet at the wall to floor junction to increase the elongation of the membrane and the incompatibility between the polyurethane membrane and the acrylic wall coating. In relation to that issue, Mr Ratcliff gave the following evidence: I found that the majority of the leaks to the balconies are along the line of the external walls. My investigation found, in most instances, that the polyurethane fillet joint had de-bonded and/or ruptured along the wall junction. There was consistency in the method of construction for me to conclude that the builder has adopted the same method of construction throughout the development.
2. Mr Ratcliff also expressed the view that the drainage system for the balconies was defective because there is no provision for a stormwater overflow.
3. The evidence is that the combined costs of rectifying both those defects is $683,374.
4. The first defect identified by Mr Ratcliff is a defect in the method of construction used (the failure to install a fillet) and the use of incompatible materials. That defect involves a breach of the warranties implied by s 18B(a) (that the work will be performed in a proper and workmanlike manner) and s 18B(b) (that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used).
5. The Kings submit that they were not liable for the defect even assuming they were developers because, on the conclusions reached by Mr Ratcliff, the defect arose from the selection of the membrane by Bonus. I do not accept that submission. It is a misreading of Mr Ratcliff's report. The selection of the membrane was one problem, but another was the failure to install a fillet. In addition, it is far from clear that the membrane was selected by Bonus. As I have said, Beach accepted the tender on the basis that it would select an alternative membrane. In any event, for the reason I gave in relation to the bathrooms, it does not matter who actually selected the membrane. The effect of s 18B(b) is to place the responsibility for selecting appropriate materials on the builder.
6. The Owners Corporation submits that the second defect is a breach of the warranty implied by s 18B(c). I do not accept that submission. It appears that stormwater overflows for the balconies was not included in the design. Consequently, for the reasons I gave in relation to the fire and safety defects, I do not accept that the defect involved a breach by Beach (or the Kings) of the warranty implied by s 18B(c).

Quantification issues

1. The Kings submit that it was inappropriate for Mr Makin to make allowances for provisional sum items and contingencies. They also take issue with his allowance for preliminaries and supervision on the basis that he indicated that he had assumed that the rectification work would take 40 weeks, but if that period varied significantly it would be necessary to adjust the allowance for preliminaries and supervision. They advance two interrelated reasons. First, they submit that an allowance for provisional sum items and contingencies is inconsistent with the ordinary principles governing the calculation of damages because they involve the recovery of damages on a speculative basis. Second, they submit that the Owners Corporation has had ample time in which to quantify its claim precisely.
2. I do not accept either of these submissions.
3. It is plain that the Owners Corporation will have to engage a builder to undertake the rectification work. Consequently, Mr Makin's evidence must be understood as evidence of the amount that the Owners Corporation is likely to have to pay a builder to do the relevant work. Since damages are assessed on a lump sum basis, it is natural to proceed on the basis that the Owners Corporation will seek to enter into a fixed price contract with a builder to do the relevant work. The likelihood is that such a builder will include amounts for provisional sum items and contingencies in fixing the price for the work.
4. In addition, Mr Makin's evidence necessarily involves an estimate of the costs of the rectification work and the length of time that it will take. In making that estimate, it is entirely appropriate to make allowance for contingencies and to proceed on an estimate of the length of time the work will take. That is what Mr Makin has done.

Conclusions and orders

1. It follows from the conclusions that I have reached that the claim against Mr King and Mrs King must be dismissed.
2. If I had concluded that the claim against the Kings succeeded, I would have concluded, in relation to the items in dispute, that the Kings were liable for rectifying the following defects: 1. The costs of rectifying water damage around the building totalling $22,769; 2. The costs of rectifying waterproofing defects with the bathrooms and ensuites totalling $711,669; 3. The costs of rectifying waterproofing defects with the balconies (excluding the costs of installing stormwater overflows).
3. The parties should bring in short minutes of order to give effect to the conclusions that I have reached. I will make those orders in chambers if they can be agreed. Otherwise, the matter should be relisted by contacting my Associate within 14 days of today's date to deal with any outstanding issues and the question of costs, if costs cannot be agreed.

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: 13 June 2017