The Owners - Strata Plan No 68372 v Allianz Australia Insurance Limited - [2014] NSWSC 1807 - NSWSC 2014 case summary

Supreme Court of NSW|2014-12-04|Before: Ball J

381; (2011) 86 ACSR 607 Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] QB 57 Category: Procedural and other rulings Parties: The Owners - Strata Plan No 68372 (Plaintiff) Allianz Australia Insurance Limited ACN 000 122 850 (First Defendant) Vero Insurance Limited ACN 005 297 807 (Second Defendant) GEO Developments Pty Limited ACN 010 621 226 (Third Defendant) Representation: Counsel: GP McNally SC with Ms A Knox (Plaintiff) HJA Neal (First Defendant) R O'Keefe (Second Defendant) M Henry SC with D A Hughes (Third Defendant) Solicitors: ITC Law (Plaintiff) Moray & Agnew (First Defendant) Vardanega Roberts (Second Defendant) Arnold Bloch Leibler (Third Defendant) File Number(s): 2007/266664 Publication restriction: N/A

Introduction 1These proceedings concern a six-stage strata development comprising 128 two- and three-storey townhouses and associated facilities in Thornleigh known as "Wild Ash Grove". The plaintiff (the Owners Corporation) is the owners corporation in respect of the development. The third defendant (previously known as Villa World Pty Ltd) (GEO) entered into four building contracts with Rubikcon Pty Ltd in 2002 and 2003 to build the townhouses on land owned by GEO. The first contract was entered into on 5 June 2002 and related to Stage 1. The second contract was entered into on 30 October 2002 and related to Stages 2 and 3. The third contract was entered into on 16 December 2002 and related to Stage 4. The final contract was entered into on 10 March 2003 and related to Stages 5 and 6. 2Rubikcon was placed into liquidation in 2005 and has since been deregistered. The plaintiff alleges, and GEO disputes, that GEO was a developer of the project within the meaning of s 3A of the Home Building Act 1989 (NSW) (HB Act) with the result that it is liable to the Owners Corporation for breaches of the statutory warranties implied by s 18B of the HB Act. The first defendant, Allianz, provided statutory home owner warranty insurance in respect of Stages 1 to 4 and the second defendant, Vero, provided statutory home owner warranty insurance in respect of Stages 5 and 6. 3In the proceedings, the Owners Corporation makes claims against GEO and the insurers in respect of more than 1500 defects affecting the common property that forms part of 124 of the 128 townhouses. The whole of the proceedings were referred to Ms Janet Grey, an architect (the referee), under Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 20.14 for enquiry and report. The referee delivered her report on 14 June 2014. She concluded that GEO was liable as a developer of the project for all of the defects she found to exist in Stages 1 to 6 and concluded that the total cost of rectifying those defects was $2,687,938.56. In addition, she concluded that Allianz was liable for defects in Stages 1 to 4 totalling $1,240,056.00 and that Vero was liable for defects in Stages 5 and 6 totalling $420,757.05. 4By a notice of motion filed on 17 July 2014, the Owners Corporation seeks orders adopting the referee's report save for the findings made by the referee in relation to the rectification of defects with the laundry floor wastes in a number of the townhouses. 5On 12 November 2014, Vero filed a notice of motion seeking orders that the Court adopt the whole of the report other than the findings concerning two matters. The first of those related to defects in the waterproofing of nine balconies and balustrades within Stages 5 and 6. The second related to findings made by the referee concerning an allegation raised by Vero that the Owners Corporation had failed to mitigate its loss in respect of defects in Stages 5 and 6 by pursuing its claims in respect of those defects diligently. Allianz seeks similar orders in respect of the referee's conclusions regarding balcony waterproofing defects affecting a number of balconies and balustrades that form part of Stages 1 to 4, but otherwise accepts that the Court should adopt the report. 6Finally, GEO takes issue with the referee's report in five respects. First, as I have mentioned, it disputes the referee's conclusion that GEO was a developer within the meaning of s 3A of the HB Act. If it is right in that contention, it has no liability in respect of any of the defects. Second, GEO takes issue with the referee's conclusion that the Owners Corporation claims for breaches of the warranties implied by s 18B of the HB Act are not "apportionable claims" under Pt 4 of the Civil Liability Act 2002 (NSW) (the CL Act). Third, GEO takes issue with the referee's conclusion that Allianz is not liable to indemnify GEO in respect of any liability that GEO has to the Owners Corporation for breaches of the statutory warranties. Fourth, GEO takes issue with the referee's conclusion that it is liable to the Owners Corporation for defects associated with inadequate underpinning. Lastly, GEO claims that para 537 of the referee's report contains a typographical error. In that paragraph, the referee states that the evidence establishes that Mr Warren Burgess is liable to "Rubikcon" under a guarantee. GEO submits that the reference to "Rubikcon" should be a reference to GEO. It is plain from other parts of para 537 of the referee's report that that is the case. No party submitted otherwise. Accordingly, para 537 of the referee's report should be adopted with the amendment sought by GEO. Nothing more needs to be said about that claim.

Principles relating to the adoption of the report 7UCPR r 20.24 provides: (1) If a report is made under rule 20.23, the court may on a matter of fact or law, or both, do any of the following: (a) it may adopt, vary or reject the report in whole or in part, (b) it may require an explanation by way of report from the referee, (c) it may, on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report, (d) it may decide any matter on the evidence taken before the referee, with or without additional evidence, and must, in any event, give such judgment or make such order as the court thinks fit. (2) Evidence additional to the evidence taken before the referee may not be adduced before the court except by leave of the court. 8The principles generally applied by the court in deciding whether to adopt a referee's report were helpfully summarised by McDougall J in Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2005] NSWSC 784 at [7] ("Chocolate Factory"). Those principles were stated by reference to Supreme Court Rules 1970 (NSW), Pt 72, r 13, the predecessor to UCPR r 20.24. However, it is clear that they apply equally to references under UCPR r 20.24: see BestCare Foods v Origin Energy LPG Ltd [2012] NSWSC 574. 9It is not necessary to set out the principles stated by McDougall J in Chocolate Factory in full. However, the following are relevant in the present context: (4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh. (5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report. (6) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than "unsafe and unsatisfactory". (7) Generally, the referee's findings of fact should not be re-agitated in the Court. 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. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence. 10In applying these principles, it is convenient in the present case first to consider the scope of the defendants' liability for defects and then to consider the four types of defect or liability which are the subject of a finding by the referee that is being challenged by one or other of the parties.

Was GEO a developer? 11Section 18B of the HB Act implies a number of warranties by a contractor who holds a licence or is required to hold a licence under the Act in every contract entered into by the contractor to do residential building work. Section 18C(1) provides: A person who is the immediate successor in title to an owner-builder, a holder of a contactor licence, a former holder or a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the owner-builder, holder, former holder or developer were required to hold a contractor licence and had done the work under a contract with that successor in title to do the work. 12"Developer" is defined in s 3A. That section, as it existed at the time of the events giving rise to these proceedings, relevantly provides: (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) ... (3) A company that owns a building under a company title scheme is not a developer for the purposes of this Act. 13The expression "residential building work" is defined in s 3 to mean relevantly "any work involved in, or involved in co-ordinating or supervising any work involved in ... the construction of a dwelling". "Dwelling" is also defined in s 3 to mean "a building or portion of a building that is designed, constructed or adapted for use as a dwelling (such as a detached or semi-detached house, transportable house, terrace or townhouse, duplex, villa-home, strata or company title home unit or residential flat)". 14It is common ground that the effect of these provisions is that GEO is to be treated as having given the warranties implied by s 18B of the HB Act if it is a developer within the meaning of s 3A. It is also common ground that, in order for the Owners Corporation to prove that GEO was a developer, it had to prove that, at the time of the construction of the townhouses, GEO was to be the owner of at least four of them. 15GEO submitted before the referee that the Owners Corporation had not proved that it would be the owner of four or more townhouses. In making that submission, it relied on cl 6.13 in each of the four building contracts between GEO and Rubikcon, by which Rubikcon acknowledged and GEO agreed that GEO "will be entering into contracts of sale prior to completion of the work by [Rubikcon]". This was said to be evidence that, at the time the building work was done, GEO had an intention not to become the owner of the completed dwellings. The fact that GEO's intention did not come to fruition and some townhouses were sold after completion did not alter the position. Moreover, GEO pointed out that there were four building contracts. Consequently, in order to succeed, the Owners Corporation had to prove that GEO was a developer in respect of each contract. That meant that it had to prove in relation to the stages covered by each contract that GEO would own at least four of the townhouses covered by that work. 16In addressing these arguments, the referee observed that, in accepting Rubikcon's tender in respect of Stage 1, Stages 2 and 3 and Stages 5 and 6, GEO described itself as "the developer of the above project". In addition, the referee observed that, in respect of each building contract, there were at least four contracts for the sale of lots that were entered into after occupation certificates had been issued in respect of those lots. Dealing with GEO's submission in respect of cl 6.13, the referee said (at para 61): Special condition, clause 6.13 did not require Rubikcon to acknowledge that GEO would be entering contracts of sale for all (or all but 3) of the lots before completion of the work or alternatively, would be disposing of the lots in some other way. The number of contracts of sale it would be entering was unspecified and the clause was not, therefore, evidence of GEO's intention to have transferred ownership of all, or all but 3, of the properties by completion of construction. 17The referee then stated her conclusions in the following terms (at para 62): GEO entered into 4 construction contracts for residential building work at the Thornleigh site. There was no evidence that, on completion, it had no intention of owning the dwellings that it had not sold off the plan and, on completion, it in fact owned many of the proposed dwellings that it had not sold off the plan. At least 4 of these in each construction contract fell into this category. This meant that it was a "developer" within the meaning of s. 3A(2)(a) of the [HB Act] and I so find. 18GEO makes a number of criticisms of the referee's reasoning. First, it submits that she reversed the onus of proof. Instead of asking whether the Owners Corporation had established that GEO would, as things stood when the building work was done under each contract, retain ownership of at least four townhouses the subject of that work, she asked whether GEO had established that it intended to sell all the lots off the plan or did not intend to own the lots that it had not sold off the plan. Second, GEO submits that the referee erred in taking into account what actually happened. The question was whether it could be said, at the time the building contracts were entered into, that GEO would own four or more townhouses when they had been built. That question was not to be answered by looking at what ultimately happened. Third, GEO submits that the referee erred in referring to the way in which GEO described itself. In describing itself as the developer, it was using "developer" in a loose sense to describe itself as the entity promoting the development. It could not be taken as using "developer" in the technical sense found in s 3A. 19I do not accept GEO's criticisms of the referee's approach. In my opinion, the referee did not reverse the onus of proof. The reasoning she adopted in para 61 was concerned with an argument raised by GEO for why it was not a developer - namely, that it had agreed with Rubikcon that it would sell townhouses off the plan. The referee was simply pointing out in that paragraph that the fact that GEO intended to sell townhouses off the plan did not mean that all the townhouses would be sold off the plan. Given the way that GEO put its case, the question was whether it was likely that GEO would sell all the townhouses off the plan and, if it did not, whether GEO would hold them until they were sold. In my opinion, the referee was entitled to assume that GEO would hold the townhouses until they were sold. She was also entitled to take into account what actually happened as some indication of what was likely to happen, and to conclude from that that GEO would continue to hold a number of townhouses following the issuing of occupation certificates. 20In my opinion, the referee was also entitled to consider how GEO described itself in correspondence in considering whether it was a developer for the purposes of the HB Act. It was reasonable for the referee to have assumed that GEO was familiar with the HB Act and, in those circumstances, it was open to the referee to conclude that the fact that GEO described itself as the developer was some indication of its intention so far as ownership of the townhouses was concerned. 21In any event, in my opinion, GEO's contention that it was not a developer is misconceived. 22GEO owned the land on which the townhouses were built. It entered into contracts with Rubikcon to build the townhouses and entered into contracts for the sale of those townhouses. In the normal course of events, it is to be expected that GEO would own the townhouses up until the time of completion and that completion would not occur until the townhouses were ready for occupation. That is so whether GEO entered into contracts for the sale of the townhouses off the plan or not. In its submissions to the referee, GEO confused entry into a contract for sale and completion of that sale. 23GEO did not seek to lead any evidence to suggest that some different arrangement applied in this case, although it was clearly in a position to do so if there was. Absent that evidence, the appropriate conclusion to draw is that, consistently with what is to be expected, GEO would retain ownership of the townhouses until completion and completion would occur after the townhouses were ready for occupation. It follows that the townhouses would, on their completion and until they were transferred to the buyers, be owned by GEO. For that reason, GEO was a developer within the meaning of s 3A.

Were the claims for breach of warranty apportionable claims? 24Part 4 of the CL Act relevantly provides: 34 Application of Part (1) This Part applies to the following claims (apportionable claims): (a) a claim for economic loss or damage to property in an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care, ... ... (2) In this Part, a concurrent wrongdoer, in relation to a claim, is a person who is one of two or more persons whose acts or omissions (or act or omission) caused, independently of each other or jointly, the damage or loss that is the subject of the claim. ... 35 Proportionate liability for apportionable claims (1) In any proceedings involving an apportionable claim: (a) the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss, and (b) the court may give judgment against the defendant for not more than that amount. (2) If the proceedings involve both an apportionable claim and a claim that is not an apportionable claim: (a) liability for the apportionable claim is to be determined in accordance with the provisions of this Part, and (b) liability for the other claim is to be determined in accordance with the legal rules, if any, that (apart from this Part) are relevant. (3) In apportioning responsibility between defendants in the proceedings: (a) the court is to exclude that proportion of the damage or loss in relation to which the plaintiff is contributorily negligent under any relevant law, and (b) the court may have regard to the comparative responsibility of any concurrent wrongdoer who is not a party to the proceedings. (4) This section applies in proceedings involving an apportionable claim whether or not all concurrent wrongdoers are parties to the proceedings. 25In para 51 of its Further Amended Defence, GEO pleads that the claim against it was an apportionable claim, that Rubikcon and Geotech Testing Pty Limited, a firm of geotechnical engineers who had been engaged by GEO to provide certain geotechnical engineering services, were concurrent wrongdoers and that GEO's liability should be reduced to an amount that reflected that proportion of the damage or loss for which GEO was responsible. 26Before the referee, the Owners Corporation contended that the claim against GEO for breaches of the warranties implied by s 18B of the HB Act was not an apportionable claim. The referee accepted that contention. In doing so, the referee acknowledged that Einstein J had reached the conclusion that claims under s 18B of the HB Act were apportionable claims in Owners Corporation SP 72357 v Dasco Constructions Pty Ltd [2010] NSWSC 819; (2010) 77 NSWLR 607 ("Dasco"). However, she concluded that she should follow the dicta of Young JA (with whom Allsop P and Macfarlan JA agreed) in The Owners - Strata Plan No 64757 v MJA Group Pty Ltd [2011] NSWCA 236; (2011) 81 NSWLR 426 ("MJA Group") to the contrary on the basis that they were "of a higher authority". In any event, the referee thought that the two cases were distinguishable. Dasco concerned a claim against a builder for breaches of the warranties implied by s 18B of the HB Act. On the other hand, MJA Group, like the present case, concerned a claim against a developer under s 18C of the HB Act. 27In my opinion, the referee was correct in the conclusions that she reached. She held that GEO itself had not been guilty of any negligence. That finding is not challenged. Consequently, GEO's only liability was liability by virtue of being a developer. The effect of s 18C is to make GEO strictly liable as developer for any breaches by Rubikcon of the warranties implied by s 18B of the HB Act. It does that by deeming GEO to have done the work done by Rubikcon pursuant to a contract between it and its immediate successor in title - in this case, the Owners Corporation. Whether or not claims for breaches of s 18B can be regarded as arising from a failure to take reasonable care, I do not see how claims under s 18C can have that character since those claims do not depend on or involve any fault on the part of GEO. 28The conclusion of the previous paragraph is reinforced by the nature of the apportionment that is required by s 35 of the CL Act. Section 35 requires the court to apportion the loss having regard to the comparative responsibilities for the loss of the concurrent wrongdoers. But how is the Court to assess the comparative responsibility for the loss in this case? GEO is responsible for the loss not by virtue of anything it did or did not do but by virtue of the fact that it is the developer. Its responsibility for the loss is determined by reference to the responsibility of Rubikcon for breaches of s 18B of the HB Act, not by reference to its own conduct. It is difficult to see how, in those circumstances, it would be possible to apportion responsibility between it and Rubikcon. 29GEO places reliance on the decision of Barrett J (as his Honour then was) in Reinhold v NSW Lotteries Corporation (No 2) [2008] NSWSC 187; (2008) 82 NSWLR 762 ("Reinhold"). In that case, the plaintiff bought a winning lottery ticket from newsagents, which was cancelled by the newsagents in error. Barrett J held that the newsagents were liable for breach of contract because they cancelled the ticket when they were not entitled to do so. He also found that New South Wales Lotteries Corporation was liable for breach of contract on the basis that the newsagents were acting as its agent. In addition, Barrett J held that both New South Wales Lotteries Corporation and the newsagents had been negligent in cancelling the winning ticket rather than another incomplete ticket which had been issued to the plaintiff at the same time. The plaintiff contended that his claim was not an apportionable one because his claim in contract did not depend on establishing that the defendants had been negligent. Barrett J rejected that contention. In doing so, he said (at [27]): The case was thus one in which each relevant "claim", as determined by the court and according to the findings actually made, was a claim in an action for damages "arising from" the failure to take reasonable care that was also at the centre of the tortious claim in negligence. This is so of both the claims in tort and the claims in contract. That, in my view, is sufficient to bring the contract claims, as well as the tort claims, within s 34(1)(a) and it makes no difference that the breaches of contract, as alleged, were not framed in terms of failure to take reasonable care. 30In Perpetual Trustee Company Ltd v CTC Group Pty Ltd (No 2) [2013] NSWCA 58; (2013) 86 NSWLR 275, the Court of Appeal differed on whether the approach taken by Barrett J in Reinhold was correct, although ultimately it was not necessary to resolve the issue. Barrett JA reiterated the approach he took in Reinhold: at [37]ff. On the other hand, Macfarlan JA thought that it was necessary that the absence of reasonable care be an element of the cause of action on which the plaintiff succeeded: at [22]. Meagher JA preferred not to express an opinion on the competing views: at [36]. 31It is not necessary to resolve the issue in this case. Here, in contrast to the position in Reinhold, there is an unchallenged finding by the referee that GEO had not been negligent. Consequently, even on the approach taken by Barrett JA, it could not be said that GEO was a concurrent wrongdoer in relation to an apportionable claim. That finding also disposes of GEO's contention that it and Geotech Testing Pty Limited were concurrent wrongdoers in relation to an apportionable claim. Similarly, it is not necessary to resolve the question whether a claim for breaches of the warranties implied by s 18B (as that section stood at the relevant time) are apportionable claims. Whether they are or not, in my opinion, a claim brought under s 18C is not.

Is GEO entitled to indemnity under the Allianz policy? 32By its Further Amended Statement of Cross-Claim, GEO claimed, among other things, that it was entitled to an indemnity from Allianz in respect of any claims against it relating to Stages 1 to 4. Allianz issued three contracts of insurance in respect of those four stages. The wording is different in some respects. However, it was not suggested that the different wording produced different results in this case and the parties' submissions focussed on the policy wording issued in respect of Stage 4. This judgment follows that approach. 33Clause 1 of that policy relevantly provides: 1 The Insurer will indemnify the Building Owner for loss or damage in respect of residential building work: 1.1 which results from non-completion of the work because of the insolvency, death or disappearance of the Contractor; 1.2 arising from breach of a statutory warranty and which either the Contractor is unable to rectify, or the Building Owner is unable to recover compensation from the Contractor, because of the insolvency death or disappearance of, the Contractor. The clause includes a number of extensions, including cover for the costs of alternative accommodation and the costs of seeking to recover compensation from the Contractor. It does not purport to cover other types of legal costs. "Contractor" is defined to mean "the person named in the Schedule who enters into a contract with the Building Owner to do the work". Rubikcon was identified in the schedule as the Contractor. 34"Building Owner" is defined in cl 12 to mean: ... the person for whom residential building work is being or is about to be carried out under a contract as defined in this policy, and any person who is a successor in title for the time being of the land or building in respect of which the work was carried out under the contract, but excludes: (a) a developer who does residential building work; (b) ...; The Schedule to the policy identifies the "Building Owner" relevantly as GEO. 35The expression "contract" is defined to mean "the contract or contracts entered into between the Contractor and the Building Owner for the carrying out of the work" and "developer" is defined to mean: [A]ny Building Owner or other person for whom residential building work is done in connection with an existing or proposed: (a) Dwelling in a building or residential development where 4 or more of the existing or proposed dwellings; or (b) ... are or will be owned by the Building Owner or said other person. 36Clause 2 of the policy provides: The Insurer may, at its option, meet its obligations under this policy, by arranging for another Contractor to satisfactorily complete the work in accordance with the terms of the contract. 37Clause 4 of the policy provides: Period of Insurance 4 The period commencing on the date the relevant contract is entered into and ending: (a) in respect of loss or damage arising from non-completion of the work, 12 months after the failure of the Contractor to commence the work or the cessation by the Contractor of the work, as the case may be; and (b) in respect of loss arising from a structural defect, the day 6 years from the completion of the work, or the end of the contract, whichever is the later (c) in respect of any other loss or damage for which this policy provides cover, the day two (2) years from the completion of the work; or the end of the contract relating to the work, whichever is the later. 38Clause 6.8 provides: The liability of the insurer under 1.1, where the Building Owner is a developer, shall be limited to any purchaser (who is not a developer) of the land on which the work is done, and the purchaser's successors in title. 39Clause 10.1 provides: The indemnity provided to the Building Owner is intended to comply with the [HB Act] and if any term of this policy conflicts or is inconsistent with the [HB Act] then this policy shall be read and be enforceable as if it complies with the [HB Act]. If any term of this policy is held to be invalid, illegal or unenforceable for any reason, that term will be deemed to be deleted and this policy shall otherwise remain in full force and effect. 40The referee gave two reasons for why GEO was not indemnified under the Allianz policies. First, she concluded that the policies excluded liability to GEO as developer (at [549]): I found above that GEO was the developer within the [HB Act] definition. The [HB Act] says that a developer is not required to be a beneficiary under an insurance contract, i.e. developer insurance is not a statutory requirement. Under the Allianz insurance policies, the beneficiary was described as the "Building Owner" and the policy definition of "Building Owner" expressly excluded a "developer". The [HB Act] legislation required consistency between the legislation and the statutory insurance scheme. The policy definition of "developer" was therefore required to be the same as the [HB Act] definition and there was no inconsistency. For these reasons I also find that the insurers are not liable to GEO to indemnify it against its liability to the Owners. 41Second, the referee concluded (at [548]) that the policies did not provide liability cover: The insurance policies were for "loss or damage in respect of residential building work .. arising from breach of a statutory warranty under Part 2C section 18B of the Act ..". They were not for liability for loss or damage to a person who was not the insured. The policies were for property insurance and not for liability insurance. 42GEO takes issue with both those reasons. As to the first, it makes two main points. The first is that GEO is named in the schedule as an insured. The second is that the exclusion in respect of the Building Owner only applied where the Building Owner was a developer who carried out residential building work. GEO did not carry out work of that nature. Rubikcon did. As to the second, it says that the policies are to be interpreted according to its terms, not by reference to preconceived notions that property insurance and liability insurance are distinct forms of insurance. 43The first reason given by the referee is not easy to follow. What she appears to be saying is that the definition of "Building Owner" expressly excludes a developer, that GEO was a developer for the purposes of the HB Act, that the definitions in the Act and the policies had to be consistent and therefore the exclusion in respect of a developer in the policies applied to GEO. 44If that is what the referee is saying, I do not accept it. The definitions did not have to be consistent. Rather, the effect of the HB Act and cl 10.1 (to take the policy in respect of Stage 4 as an example) is that the policy had to provide cover consistently with the Act. It could provide more extensive cover. But it could not exclude liability, and is not to be interpreted as excluding liability, that was required to be covered under the Act. 45The definitions of "Building Owner" and "developer" in the policy are confused. "Building Owner" is defined to include a person for whom residential building work is being done other than a developer who does residential building work. "Developer" is defined to be a Building Owner or any person for whom building work is done in connection with a development with four or more existing or proposed dwellings. In a broad sense, this definition picks up the definition of "developer" in s 3A of the HB Act. However, the difficulty with the definitions is that they involve a degree of circularity because "Building Owner" is defined by reference to "developer" and "developer" is defined by reference to "Building Owner". It seems clear, however, from these definitions that a Building Owner can include a person who is a developer in the sense used in s 3A and reflected in the definition in the policy provided that person does not do residential building work. Contrary to a submission made by Allianz, it could not be said that GEO did residential building work. Its liability arises not because it did residential building work but because it is deemed to have done work of that type under s 18C. That deeming provision is not mirrored in the policy. And I can see no reason why the words of the policy should be construed to have that effect, when, on their face, they do not. It follows that GEO was a Building Owner for the purposes of the policy and, subject to any other provisions of the policy, is entitled to the cover provided by cl 1.2. 46The conclusion of the previous paragraph is reinforced by cl 6.8 of the policy. That clause limits the liability of the insurer, where the Building Owner is a developer, to any purchaser from the Building Owner who is not itself a developer. However, that limitation is restricted to the insurer's liability under cl 1.1. It would have been a simple matter to extend cl 6.8 to cover the insurer's liability under the whole of cl 1 if that was what was intended - making it clear that the policy did not cover a person who was a developer for the purposes of the HB Act (as reflected in the definition of "developer" in the policy). Moreover, if the true position is that the effect of the definition of "Building Owner" was intended to exclude any person who was a developer within the meaning of the Act, cl 6.8 would serve no purpose. 47On the other hand, I accept the second reason given by the referee for why GEO is not entitled to indemnity under the policy. It is true, as Allianz submits, that the policy must be construed according to its terms. However, it must be construed in a context where there is a clear distinction between loss arising from property damage or defective workmanship and loss arising from a liability owed to another; and that distinction is a well recognised one in insurance law. The policy must also be construed in a context where it was issued as a form of compulsory insurance required by the HB Act. As Campbell JA (with whom Meagher JA agreed) explained in Vero Insurance Ltd v Kassem [2011] NSWCA 381; (2011) 86 ACSR 607 at [58] : The legislative purpose in requiring the insurance to be in place was not to provide cover to a developer such as the Developer. Indeed, the legislation specifically permitted an insurer to exclude liability to a developer, as the Insurer actually did. The legislative purpose was instead to ensure that the insurance was in place for the eventual purchasers of dwellings in the building. 48Having regard to that context, the question is whether an indemnity given to the "Building Owner" for "loss or damage in respect of residential building work ... arising from breach of a statutory warranty and which either the Contract is unable to rectify, or the Building Owner is unable to recover compensation from the Contractor ..." is sufficiently wide to cover GEO's liability to the Owners Corporation under s 18C of the HB Act. In my opinion, it is not. The policy was not taken out for that purpose. It was taken out to provide protection to purchasers of the townhouses in accordance with a statutory obligation to take out insurance of that type. It is plain from the wording of the policy that the indemnity is given to the "Building Owner" in respect of losses that person suffers as a result of a failure of the Contractor to rectify work (or pay compensation in respect of that work) that does not comply with the statutory warranties. Those losses arise from defects in the building work, not from the liability of the Building Owner. That conclusion is reinforced by cl 2, which permits the insurer to discharge its obligations by arranging for another contractor to complete the work. That would be a strange way of discharging an obligation to indemnify a person against a liability incurred by that person; and, in some cases, it is difficult to see how an indemnity could be given in that way. For example, assume that a developer is sued by an owners corporation to judgment. How, in that case, could the insurer indemnify the developer by arranging for another contractor to do the work? The obligation of the developer in that case would be to pay the judgment amount. If the policy had intended to cover a developer's liability under s 18C of the HB Act, it is to be expected that it would say so in clear terms. It does not.

The claim in respect of laundry wastes 49In the case of a laundry waste that is connected directly to a sanitary drainage system, it is necessary, in order to prevent noise and odours escaping from the laundry waste, to create a seal between the opening of the waste into the laundry and the drainage system to which the laundry waste pipe is connected. That seal is normally created by a bend in the waste pipe, which traps water that then creates the seal. In that case, in order to maintain the seal, it is necessary to ensure that the water that creates the seal is replenished - or "charged" - from time to time. In the case of the townhouses the subject of these proceedings, the drawings for the townhouses indicated that, where it was intended to connect the laundry waste directly to the drainage system, a water seal would be used and that seal would be charged by connecting the drain of the laundry tub to the laundry floor waste. Those connections were not installed, as a result of which the seals were not charged and a number of residents experienced noise and unpleasant odours from their laundry floor wastes. 50It was not disputed before the referee that it is impractical now to connect the laundry tubs to the floor wastes. Instead, various solutions were proposed. The one favoured by the Owners Corporation is to install a mechanical trap priming device in each of the affected laundries. Some of the laundries have concrete floors and some have wooden floors. The evidence is that the cost of installing the mechanical trap priming device in laundries with concrete floors is $7,500. There was a dispute between the experts concerning the cost of installing a mechanical trap priming device in laundries with wooden floors. However, the Owners Corporation is prepared to accept the lower figure of $1,050. 51Mr Heintz, the expert retained by the Owners Corporation, did refer to an alternative solution which involved the installation of a single level mixer with a retractable hose over the laundry tub which would permit residents to charge the waste manually. He did not recommend that solution. 52A third solution proposed by Mr Zakos, an expert engaged by GEO, was to install a grate seal trap (also known as a gasket seal), which would prevent rising odours but allow water to pass from the top. It is agreed that the cost of installing a trap of that type is $100 per laundry. 53Mr Heintz, Mr Zakos and Mr George, an expert retained by Allianz and Vero, prepared a joint report in which they agreed that the appropriate method of rectifying the defect was to install a grate seal trap. However, in cross-examination, Mr Heintz gave evidence that that solution was only supplementary and that it would not comply with the Australian Standard in force at the time the building contracts were entered into. On that basis, the Owners Corporation contended for the installation of a mechanical trap priming device in each affected laundry. On the other hand, the position taken by Mr Zakos was that the relevant Australian Standard had been amended in 2010. The referee described Mr Zakos's evidence on this subject in the following terms (at [368]): ... under the current December 2010 edition [of the Standard], a gullied floor waste could be charged by a hose tap in the same room. He said that a hose tap was located next to the washing machine space (and not over the laundry tub) in each laundry he inspected and so the laundries complied with the current regulations. The amended Standard allowed for: "Hose tap installed in the same room if floor is graded to the floor waste gully." Mr Zakos said that to his "distinct recollection" the laundry floors were graded to a fall. He said that to charge the floor waste it would be necessary to unscrew the hose to the washing machine and screw a flexible garden hose to the hose tap and charge the waste. Mr Zakos was taken to his earlier evidence about the disadvantages of installing a single lever mixer tap with a retractable hose where he had said that there was a possibility that the hose might not be long enough to reach the waste and there would be a recurring maintenance liability for the owners [caused by the laundry floor tiles becoming wet]. He was asked if the flexible hose solution would have the same disadvantages. He said a flexible hose would reach the floor waste but did not give a responsive answer to the recurring maintenance problem that he had previously identified. 54After concluding that there was a defect, and repeating the effect of Mr Zakos's evidence, the referee said this (at [376]): Mr Zakos was a reliable and experienced expert witness and I accept his evidence on these matters and find that to meet current regulations it is unnecessary to provide a mechanical trap priming device. Although the provision of a gasket seal will not charge the waste, the hose connected to the hose tap will allow for this and the gasket will provide a supplementary protection. For these reasons I accept the evidence of the experts set out in their joint report ... that the appropriate method of rectification is to provide a grate seal product. 55The Owners Corporation takes issue with this conclusion. It submits that, in accordance with the principle stated by the High Court in Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 and Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 ("Tabcorp"), it was entitled to have installed in each affected laundry an automatically charged floor waste unless the solution proposed was an unreasonable course to adopt. The referee did not consider the application of that principle in this case, although it is apparent that the application of the principle was the subject of submissions before her. 56In my opinion, the referee made an error of principle in not identifying what was required in order to achieve conformity with the contractual specification and asking the question whether that was a reasonable course to adopt. Instead, the referee appears to have focussed on what was necessary to meet the current Australian Standard. Once she was satisfied that that standard was met, she accepted the conclusion of the joint expert report without considering the question whether that recommendation achieved contractual compliance or, if it did not, whether it should nonetheless be accepted because any alternative was unreasonable. I do not think it was open to the referee simply to accept the evidence given by the experts in the joint report without considering those questions, particularly when one of the experts, Mr Heintz, resiled from the opinions expressed in that report when giving evidence. 57GEO submits that what was necessary to meet the contractual specification was a seal that prevented odour and noise and that a grate seal trap did that. I do not accept that submission. The referee found that a gasket seal would provide "supplementary protection" to manual charging of the trap. That finding was consistent with the information before her concerning the proposed seal. The promotional literature for the "Dekfit GrateMate", which appears to have been the preferred grate seal trap, shows the trap being fitted to a system that included a water seal created by an S bend that was charged by water from "Shower/laundry/trough discharge". The installation instructions for that product stated that it was necessary to ensure that "at least 50 mm of the pipe [that formed part of the product] is sitting in the water in the 'S' trap". Similarly, the certification schedule for the product stated as part of the "Product Description/Application" that "[t]he product is installed in the sanitary drainage system and provided supplementary to a waste trap". The grate seal trap alone did not satisfy the requirements of the current Australian Standard, let alone the one that existed at the time the relevant building contracts were entered into. It is not disputed that the specification contained in the building contracts required the installation of a water seal that would be automatically charged from the laundry tub. In my opinion, what Rubikcon was required to provide was a trap that was charged automatically, not one that was charged manually. 58GEO submits that it would be unreasonable to require the installation of a mechanical trap priming device given the costs and given that a grate seal trap would address the concern that residents had with odours and noise. I do not accept that submission. 59In Tabcorp at [17], the High Court referred to an example of unreasonable insistence on compliance with a contractual specification given by the Court in Bellgrove v Eldridge at 618. The example was of a contract requiring the erection of a house with cement render external walls of second-hand bricks. The Court said that it would be unreasonable for the owner to require demolition of the walls if the builder had constructed them of new bricks of first quality. Commenting on this example, the Court in Tabcorp said: That tends to indicate that the test of "unreasonableness" is only to be satisfied by fairly exceptional circumstances. The example given by the Court aligns closely with what Oliver J said in Radford v De Froberville, that is, that the diminution in value measure of damages will only apply where the innocent party is "merely using a technical breach to secure an uncovenanted profit". In this passage, the Court was concerned with when it was appropriate to award damages by reference to diminution in the value of the property rather than the costs of compliance with the contractual promise. But there is no reason why the principle should not apply equally where the choice is between a solution that gives the injured party something equivalent to the contractual promise compared to a solution that goes part way to addressing the same problem as that addressed by the contractual obligation. 60In the present case, there was no finding by the referee that the installation of a grate seal would completely address the issue of odours and noise. It may be that the experts proceeded on that basis. However, no explanation was given for why they did so. The available literature suggests that a grate seal would be supplementary to a water seal. The installation diagram and notes indicated that at least 50 mm of the pipe that formed part of the grate seal had to sit in the water of the S trap. It is unclear from the evidence how effective the seal would be if the grate seal was not installed in that way, or if there was no water in the S trap because the trap was not charged. Consequently, I am not satisfied that the installation of a grate seal would be a complete solution to the problem. 61The defendants point to the expense of installing a mechanical trap priming device, particularly in laundries with concrete floors. However, in my opinion, the residents were entitled to have an effective seal in their laundry wastes which did not require manual charging. That was what the building contract specified. The failure to provide such a seal was not merely a technical breach. It affects the use and enjoyment of the townhouses. No other solution was proposed that, on the evidence, was effective. Accordingly, in my opinion, the Owners Corporation is entitled to recover the costs of installing mechanical trap priming devices in each affected laundry. 62There is some uncertainty concerning the number of affected laundries and the number of those that had wooden floors and the number that had concrete floors. 63According to the referee's report, there were 118 affected townhouses. However, the Owners Corporation accepts that that is an error and that it only made a claim in respect of 114 lots. Of those 114 lots, the evidence is that 64 had concrete floors and 48 had timber floors. That leaves two unaccounted for. The Owners Corporation is prepared to assume that they had timber floors. On that basis, the Owners Corporation claims $532,500 ($7,500 x 64 concrete floors + $1,050 x 50 timber floors) from GEO. 64The Owners Corporation does not dispute the finding of the referee that the laundry waste defect was "non-structural" and that, as a result, the claims against the insurers in respect of the laundry waste defect were out of time for Stages 3 to 6. Accordingly, it accepts that Vero has no liability in respect of this defect and Allianz is only liable for defects in Stages 1 and 2. There are 42 units in Stages 1 and 2 affected by the defect. It is not possible on the state of the evidence to determine which of those had concrete floors. Accordingly, the Owners Corporation is prepared to assume that all of the floors were timber. On that basis, it claims $44,100 ($1,050 x 42 timber floors) from Allianz. 65The townhouses that comprise the development are of 11 different types. GEO points out that the hydraulic contracts drawing for 5 of the 11 different design types required no connection between the laundry tub and the laundry floor waste because it was intended that those floor wastes would be dry floor wastes that would drain to the outside. GEO submits that 31 of 114 townhouses in respect of which a claim is made fall into that category and that, even if the Owners Corporation's claim succeeds, it should not succeed in relation to those 31 units. As the Owners Corporation points out, the difficulty with this submission is that the evidence suggests that those floor wastes were not constructed in accordance with the drawings. Mr George gave the following evidence in his first report on the issue: I did not observe any of the dry floor wastes extending through the external façades at the time of my inspection and it is likely that the external ground levels may have prevented the installation of the dry floor wastes as documented. That evidence was not challenged during the course of the reference and the reference proceeded on the basis that each of the laundry floor wastes was defective because it was not charged. Having regard to Mr George's evidence and the basis on which the reference proceeded, it is not open to GEO now to contend that there was not a defect with the relevant laundries or that there is some other means by which that defect should be rectified. 66It follows that the Owners Corporation is entitled to judgment against GEO in the sum of $532,500 and against Alliance in the sum of $44,100 in respect of the laundry floor wastes.

The claim in respect of underpinning 67In its Further Amended List Statement, the Owners Corporation makes a claim in respect of cracking and movement in the brickwork and other parts of the building forming part of Stage 3. The defects affect lots 48, 49, 50, 51, 52, 53, 54, 56 and 57, which were constructed on sloping sites. The Owners Corporation claimed before the referee that it should be entitled to recover the costs of rectifying the defects by underpinning the affected townhouses or, alternatively in relation to lot 57, by demolishing the townhouse and rebuilding it. The Owners Corporation conceded that one of the causes of the loss was defective design with the result that it accepts that Allianz was not liable for the defects. However, the Owners Corporation claimed that GEO was liable for the defects; and GEO filed a cross-claim against Allianz in respect of that claim. For the reasons I have already given, the referee was correct to find that that cross-claim should fail. That is so whether the design was defective or not. 68A number of issues were raised before the referee in respect of the claim. However, the only finding of the referee that is in issue is her finding that GEO was liable for the defects because it was in breach of the warranties implied by s 18B(c) and (e). Those warranties are in the following terms: (c) a warranty that the work will be done in accordance with, and will comply with, this or any other law; (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. 69The referee found that there were a number of causes of the cracking and movement. One was that the fill material was not properly compacted. Another was that "the geotechnical testing carried out on the site during and after the bulk earthworks phase of the construction process was fundamentally flawed and resulted in the site being incorrectly classified as 'M' rather than 'P'", which affected the footing design. The referee also found that the footing design was defective, even if the site had properly been classified as "M". 70GEO submitted before the referee that Rubikcon was not in breach of the warranties implied by s 18B(c) and (e) of the HB Act because the relevant work fell outside its contract. Rubikcon was not responsible for the design and had no role in specifying, compacting or certifying the fill. Rather, its task was to construct the footings in accordance with the drawings provided to it, which is what it did. In making that submission, GEO relied on the decision of the Court of Appeal in Building Insurers' Guarantee Corporation v The Owners - Strata Plan No 60848 [2012] NSWCA 375. In that case, the builder had been engaged to convert an existing office building into residential apartments. The builder was not required to do any work on the external façade, although it identified a problem with the waterproofing of the façade. Following completion of the work, the façade leaked. The owners corporation made a claim against the builder for breaches of the warranties implied by s 18B in respect of that defect. The Court of Appeal held that the claim must fail. In reaching that conclusion, Bergin CJ in Eq (with whom Macfarlan JA agreed) said (at [51]): The extent of the builder's contract as found by the Tribunal was that the builder was to do the work that the developer contracted it to do. The fact that the builder identified a problem and was not asked by the developer to do any work in respect of the problem does not amount to "a provision of an agreement" purporting to restrict or remove the rights of a person in respect of any statutory warranty. There is no legislative intention in the provisions of the HB Act, and in particular s 18G, to impose on a person who identifies a problem with building works not the subject of its contract and not incidental building work to its contract, a contractual obligation to complete the works. Similarly, Sackville AJA (with whom Macfarlan JA also agreed) said (at [72]): I agree with Bergin CJ in Eq that the primary Judge erred in law in holding that s 18B(e) of the HB Act applied to the building contract so as to make the builder liable for failing to render the building waterproof. In view of the Tribunal's finding of fact that the building contract did not extend to waterproofing work, s 18B(e) could not operate to impose an implied term requiring the builder to carry out waterproofing work so as to render the premises fit for occupation as a dwelling. GEO submitted that, since Rubikcon was not liable under s 18B, it could not be liable under s 18C. 71The referee rejected GEO's submission. She gave the following reasons for her decision: 208 ... In my view, however, there was a critical difference between the Building Insurer's case and this matter. In this matter Rubikcon contracted to carry out the whole of the construction of each of the dwellings for which the claims were made whereas the builder in the Building Insurer's case only contracted to carry out part of the construction. It did not construct or contract to construct the external walls where the fault was found. Where Rubikcon entered the 4 contracts with GEO, it warranted that the buildings that it constructed would comply with all relevant law and that they would be reasonably fit for occupation as dwellings. The fact that it did not provide the soil classification, perform the bulk earthworks or design the footings did not relieve it of these warranties, which were in the nature of strict promises. ... 209 The uncontested evidence established that the construction was in breach of AS 2870-1996 Residential slabs and footings - construction in that the walls sustained damage category 3 and 4. Rubikcon was, therefore, in breach of the s 18B (c) warranty and I so find. 210 In addition, I accept the largely uncontested evidence of Mr Palmer that [without underpinning] the ongoing movement in the buildings will result in continued water penetration, internal damage to the building and detriment to the building components of the structure, which will lead to unhealthy living conditions. This analysis is supported by the description of damage category 3 and 4, which the geotechnical engineers agreed the buildings had sustained. I also accept the uncontested evidence of Mr Zakos that, if not rectified, the buildings will continue to deteriorate. For these reasons I find that the buildings that are the subject of the claim are not reasonably fit for occupation as dwellings and that there is, therefore, a breach of s 18B (e) of the [HB Act]. 72The issue before the referee turned on the correct construction of s 18B of the HB Act and the relevant building contract. They raise questions of law which, in accordance with the principles stated by McDougall J in Chocolate Factory at [7], it is necessary for me to consider afresh. 73In support of the approach adopted by the referee, the Owners Corporation relied on the decision of Howie J in The Craftsmen Restoration & Renovations Pty Ltd v Boland [2008] NSWSC 660 ("The Craftsmen") (overturned on another point: [2011] NSWCA 147) and Ward J (as her Honour then was) in The Owners - Strata Plan No 62930 v Kell & Rigby Holdings Pty Ltd [2010] NSWSC 612 ("Kell & Rigby"). 74In The Craftsmen, one of the major defects in issue was leaking windows. The windows had been purchased by the builder on the instruction of the owners and their architect. An issue arose concerning whether the cause of the leaks was defects in the manufacture of the windows or defective installation. Howie J agreed with the finding of the CTTT that the cause was defective installation by the builder. But, ultimately that conclusion did not matter. Even if the problem was with the manufacture of the windows, the builder was still liable for a breach of the warranty implied by s18B(b) of the HB Act. That warranty was in these terms: 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, ... There was no question that the builder had supplied the windows. Consequently, he was liable for any defect in them, even if they had been selected by the owners. 75In Kell & Rigby, the air conditioning system in a prestige apartment building was defective. The main cause of the defect was that the system had not been designed to include "balancing valves". The builder maintained that it was not responsible for that defect because it was not responsible for the design of the air conditioning system and had installed the system that it was contracted to install. Ward J, relying on The Craftsmen, rejected that submission. She concluded that the builder was in breach of a warranty that the building work and any materials used in doing the building work would be reasonably fit for the specified purpose or result which was implied by s 18B(f). In reaching that conclusion, her Honour said (at [325]): Here, the decision to supply a particular product which does not prove to be suitable or even perhaps a product with particular specifications ... does not in my opinion assist the Builder in circumstances where, whatever was to be supplied, there was an overriding contractual specification in relation to its purpose and intended operation and the system as supplied did not meet that. 76In my opinion, the referee took the correct approach to this issue. On the unchallenged findings she made, the footings constructed by Rubikcon did not comply with AS2870-1996. It was not disputed that that standard was an applicable law for the purpose of s 18B(c) of the HB Act. Consequently, the work done by Rubikcon did not comply with a relevant law with the result that Rubikcon was in breach of the warranty implied by s 18B(c). Similarly, the footings were constructed by Rubikcon. That work did not result in a dwelling that was reasonably fit for occupation as a dwelling. Consequently, Rubikcon was in breach of the warranty implied by s 18B(e). In both cases, it does not matter that Rubikcon was not responsible for the design of the footings or the compaction and testing of the fill - just as it did not matter in The Craftsmen that the builder was not responsible for the manufacture or choice of windows. The warranties given in s 18B(c) and (e) were given in relation to the work that Rubikcon did, and that included the construction of the footings. The decision in Building Insurers' Guarantee Corporation v The Owners - Strata plan No 60848 is distinguishable because there the builder had no obligation and did no work in the relation to the exterior façade of the building. 77It follows that this aspect of the referee's report should be adopted.

The claim in respect of balconies and balustrades 78The referee found that there were defects affecting the waterproofing of the balconies and balustrades; and there is no challenge to her findings in that regard. The only question is whether those defects were the result of faulty design or construction defects or both. The significance of this issue is that the Allianz policies and the Vero policy all excluded liability for faulty design. The exclusion in the Allianz policies were in these terms: The Insurer shall not be liable for any claim for loss or damage: ... in relation to a defect due to a faulty design provided by the Building Owner, or a previous owner; The exclusion in the Vero policy was in these terms: We will not pay: ... a claim in relation to a defect due to a faulty design provided by you or your predecessors in title. It was not suggested that these exclusions were materially different for present purposes. The question for the referee was whether the exclusions applied. 79The referee began her discussion of this topic by referring to the decisions in Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] QB 57; McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; (2007) 157 FCR 402 and Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243. The referee summarised her understanding of those decisions in these terms (at [278]): Allianz and Vero submitted that, in relation to the balconies, 2 causes of the loss were present: one that was covered by the policy and one that was excluded from cover. The first was the builder's failure to perform the work in a proper and workmanlike manner and in accordance with law, in breach of the [HB Act] s. 18B warranties and the second was faulty design. From the first principal [sic] explained in McCarthy v St Paul International Insurance Co Limited, for the exclusion clause to operate: 1) each had to be a proximate cause of the loss; and 2) neither would have caused the loss without the other. In relation to co-mingled causes, each must operate concurrently, but independently, in the sense that each would have caused the loss without the other. 80Having stated that principle, the referee went on to consider the evidence concerning the balcony and balustrade construction. She summarised her conclusion in these terms (at [283]): In summary, a primary, proximate cause of the loss was the failure of the builder to comply with building regulations and to construct the balconies in a good and workmanlike manner. The result of this was potential collapse. The builder was therefore in breach of statutory warranties 18B(a), (c) and (e) I so find. 81The referee then turned her attention to the question of faulty design. In relation to that issue, she reached the following conclusion (at [287]): On my analysis there can be 2 kinds of deficiencies in design drawings. One is where the design is plainly wrong and the other is where the drawings provide little or no direction to a builder on what to build. ... An example of the second [kind] would be a drawing where no flashing is illustrated. In this instance the builder would need to decide where to build with or without a flashing and if building with a flashing, where it should be located. The evidence established that the deficiencies were of the second category, in that the waterproof measures that were necessary were not described on the drawings. I accept that the drawings were deficient in this respect and therefore "faulty", however, I do not accept that these deficiencies were sufficient on their own to have caused the loss. The common evidence of the building experts, which I accept, was that a competent builder should have been able to construct the balconies in a waterproof fashion without the assistance of a detailed design. It does not, therefore, meet the Wayne Tank principal [sic]. Accordingly I find that the design exclusion in the insurance policies does not apply ... 82There are difficulties with the approach taken by the referee. 83First, she appears to have misstated the "principle" in McCarthy v St Paul International Insurance Co Ltd. The principle is that, if there are two proximate causes of a loss, one of which is the subject of an exclusion, then normally the policy will be interpreted as excluding liability for the loss even though the other cause of the loss fell within the insuring clause. That is so whether the causes are interdependent in the sense that neither would have caused the loss without the other or independent in the sense that each alone was sufficient to cause the loss. The referee appears to have thought that the principle she identified only applied in the first type of case. 84Moreover, as the insurers point out, the referee did not address directly the question whether the defective design was a proximate cause of the loss. In order to address that question, the referee had to consider the question whether, if the design had not been defective, the defects in the waterproofing would not have occurred. The referee seems to have accepted that a non-defective design would have described "the detailed construction of the decks, which if followed conscientiously, would have resulted in a watertight result" (at [284]). However, she makes no specific finding concerning whether the builder would have followed the design conscientiously. The referee does say that the deficiencies in design "on their own" were not sufficient to cause the loss. The reason she gives is that, even with the deficiencies in design, if the work had been done in a proper and workmanlike manner, the defects would not have occurred. But that does not rule out the defective design as a cause of the loss. If the true position was that the loss would not have occurred but for the defective design, then the defective design was also a cause of the loss. The referee misstates the test of causation in terms of sufficiency. 85The question remains whether it can be said that the loss was "due to" the defective design. The referee made the following findings in relation to the causes of the loss: 280 The evidence established that the direct causes of this loss were: 1) a failure to flash at the junctions of the floor/parapet and the parapet/masonry junctions, 2) a failed membrane system with multiple potential causes including inadequate framing (absent trimmers) under floor sheet joins leading to deflection of the sheets and membrane tears, poorly applied membrane with variable thickness; and 3) the absence of sarking on the framed balustrades. All this led to water penetration that, among other things caused the structural frame of the balustrade and the floor to rot. ... 281 The water penetration was concentrated at the parapet/floor and parapet/masonry junctions and the evidence established convincingly, in my view, that it was penetration from these sources that was the primary cause of the rot in the timber frame. There was also evidence of moisture penetration under the flooring where trimmers were absent, which allowed the floor sheets to deflect and which in turn caused the membrane to tear. There was, however, no evidence that moisture from this source caused any rot. It appeared, at least on the balance of probability, that this penetration and localised failure of the membrane could have been repaired locally. Again, those findings were not challenged. 86The onus is on the insurers to prove that the exclusion in respect of defective design applies: Trickett v Queensland Insurance Co Ltd [1936] AC 159 at 164; [1936] NZLR 116 at 119; Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390; (1986) 4 ANZ Ins Cas 60-749; Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd (1989) 15 NSWLR 641; (1989) 5 ANZ Ins Cas 60-903. Consequently, the onus is on the insurers to prove that, if the design had not been defective, the loss in respect of the balconies and balustrades would not have occurred. On the available material, the insurers have not discharged that onus. On the findings made by the referee, the causes of the loss in respect of which the Owners Corporation sues were the failure to flash the junctions and the absence of sarking. The referee also found that there were problems with the membranes, but in her view that problem could have been remedied by repairing the membranes. It was not a cause of the loss which led to a requirement to demolish and rebuild the balconies. It is apparent from the referee's findings that she thought the design was defective because, among other things, it did not show the areas where flashings and sarking should be installed. Consequently, on her findings, if the design had not been defective and had been followed conscientiously, the loss in respect of which the Owners Corporation sues would have been avoided. However, that still leaves the question whether Rubikcon would have followed the drawings conscientiously if they had shown where the flashings and sarking were to be installed. I am not satisfied that it would have. No evidence was led by the insurers from which that conclusion could be drawn. They did not, for example, point to other findings made by the referee that suggested that Rubikcon followed the specifications for the townhouses carefully. The evidence was that Rubikcon did not follow the drawings in other respects. For example, it did not follow the drawings showing the connection of the laundry tubs to the laundry floor wastes. Consequently, absent some evidence, it could not be inferred that Rubikcon would have followed detailed drawings if they had been supplied. It follows that the conclusion reached by the referee should be adopted.

Vero's claim that the Owners Corporation did not mitigate its loss 87Before the referee, Vero submitted that the Owners Corporation failed to mitigate its loss by pursuing its claim against Vero diligently and, in particular, failed in response to requests from Vero to identify which defects related to the stages in respect of which Vero had provided insurance. Vero submitted that, as a result, the Owners Corporation's loss or damage should be limited to the reasonable costs of engaging a builder in August 2009 to rectify the defects. The evidence before the referee was that costs had increased 11.48 per cent from the time when Vero says that the defects should have been rectified. 88In rejecting Vero's claim, the referee said (at [525]): ... since [August 2009] Vero has had the benefit of the money it would otherwise have spent and it has not, therefore demonstrated any loss. Accordingly, I find that the Owners are entitled to escalation costs at 11.48% to cover the period from August 2009 to 24 March 2014 ... 89Vero submits that "[t]he Referee failed to consider relevant legal principles" when considering the allegation that the Owners Corporation had not mitigated its loss. However, Vero gave no explanation of what those principles were in its written submissions. In oral submissions, Mr O'Keefe, who appeared for Vero, suggested that the error was in failing to consider Vero's submission in support of its contention that the Owners Corporation had delayed unreasonably in replying to Vero's request for information. 90In my opinion, the referee was entitled to deal with the matter in the way that she did. She was entitled to conclude that Vero had not established that it had suffered any loss as a consequence of the delay because it had the benefit of the money that it would, on its submission, have paid in respect of the defects claimed by the Owners Corporation and it had not established that that benefit was outweighed by the savings that could have been made if the defects had been rectified earlier. Having reached that conclusion, it was unnecessary for the referee to make findings concerning the way in which the Owners Corporation dealt with the claim and whether that conduct amounted to a failure to mitigate its loss. 91The referee's report on this issue should be adopted.

Orders 92The whole of the referee's report should be adopted save for the finding in para 376 that the appropriate method of rectification of the laundry floor wastes was to install a grate seal and an amendment to para 537 to substitute for the word "Rubikcon" in the last sentence of that paragraph the expression "GEO". 93The parties should bring in short minutes of order by 13 February 2015 dealing with adoption of the referee's report and the proceedings generally to give effect to this judgment. If the parties cannot agree on the form of orders by that time, the matter should be relisted by contacting my Associate to deal with any outstanding issues. I will also hear the parties in relation to 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: 18 December 2014

The Owners - Strata Plan No 68372 v Allianz Australia Insurance Limited

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