The Owners - Strata Plan No. 69567 v Baseline Constructions Pty Ltd - [2013] NSWSC 409 - NSWSC 2013 case summary

Supreme Court of NSW|2013-04-16|Before: Stevenson J

Introduction 1This is the determination of questions that, on 23 November 2012, the Court ordered to be heard separately from and prior to all other questions. 2The plaintiff ("the Owners Corporation") is the registered proprietor of the common property of a residential unit development in Rosebery ("the Property"). The Owners Corporation alleges that there are defects in the common property that have resulted from breaches of: - (a)statutory warranties implied under the Home Building Act 1989 ("the Act") the benefit of which the Owners Corporation claims to be entitled to against, relevantly, the second defendant, Baron Corporation Pty Ltd ("Baron"); and (b)a duty of care allegedly owing by Baron to it. 3The separate questions are: - (a)whether the Owners Corporation is entitled to the benefit of such statutory warranties against Baron; and (b)whether Baron owed the Owners Corporation the duty of care contended for. 4The Owners Corporation does not press its contention that Baron owed it a duty of care. That aspect of its claim must be dismissed at an appropriate time. 5The issue for me to determine is the Owners Corporation's entitlement to the statutory warranties for which it contends.

Decision 6The Owners Corporation is entitled to the benefit of the statutory warranties against Baron.

Background 7Immediately prior to the issue of the relevant strata plan, the registered proprietors of the Property were Baron and a related company, Oldtex Pty Ltd ("Oldtex"), as tenants in common. Oldtex is now deregistered. 8The development proceeded in three stages. In relation to those stages, Baron (and in one case Baron and Oldtex) entered into agreements ("the Development Agreements") with a related company, Metro Village Development Pty Limited ("Metro"). 9Metro entered into contracts ("the Building Contracts") with Baseline Constructions Pty Ltd ("Baseline") to construct each of the buildings in the three stages. Baseline carried out the building work ("the Work"). 10Baseline is the first defendant in the proceedings but is now in external administration. It played no role in the proceedings before me. 11On registration of the strata plan at each stage: - (a)the Owners Corporation became the owner of the common property of the development; and (b)Baron became the owner of more than four of the dwellings in the development.

The applicable legislation 12It is common ground that s 18C and s 3A of the Act were in the following form on 22 October 2009, on which date these proceedings were commenced in the NSW Consumer, Trader and Tenancy Tribunal (it being common ground that this is the relevant date): - "18C Warranties as to work by others 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 contractor licence and had done the work under a contract with that successor in title to do the work." "3A Application of provisions to developers (1) For the purposes of this Act,... 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 [a] ... proposed...residential development where 4 or more of the... proposed dwellings.. will be owned by the...corporation...". (emphasis added)

The Issues 13There is no dispute that: - (a)the Owners Corporation was the immediate successor in title to Baron (and Oldtex); and (b)the Work was "residential building work" for the purposes of the Act. 14Whether the statutory warranties were enlivened depends on whether Baron is a "developer" for the purposes of s 18C. 15As Baron became the owner of more than four dwellings in the development, the requirements of s 3A(2) were satisfied. Thus, Baron is a "developer" for the purposes of s 18C (and thus a person in respect of whom the Owners Corporation is entitled to the benefit of the statutory warranties) if, but only if, it was the party "on whose behalf" the Work was done. 16Mr Roberts SC, who appeared with Mr Davie for the Owners Corporation, submitted that Baron was the party "on whose behalf" the Work was done for four reasons: - (1)first, that, by the Development Agreements, Metro itself agreed to do the Work, and did so "on behalf of" Baron; (2)second, that Baseline did the Work under the Building Contracts "on behalf of" Baron; (3)third, Metro undertook the procurement of the Work as agent for Baron; and (4)fourth, Metro held the promises given to it by Baseline in the Building Contracts as trustee for Baron.

Amendments to the Act after the relevant date 17After the relevant date, the Act was amended on two occasions; in 2010 and 2011. 18Both amendments were evidently intended by Parliament to overcome the effect of the decision of the Court of Appeal in Ace Woollahra Pty Ltd v The Owners-Strata Plan 61424 [2010] NSWCA 101; (2010) 77 NSWLR 613 per Tobias and McColl JJA and Sackville AJA. I will return to that decision below.

The 2010 amendments 19The Home Building Amendment (Warranties and Insurance) Act 2010 ("the 2010 Amendment Act") introduced into s 3 of the Act the definition of a "non-contracting owner" as follows: - "non-contracting owner, in relation to a contract to do residential building work on land, means an individual, partnership or corporation that is the owner of the land but is not a party to the contract and includes any successor in title to the owner". 20The 2010 Amendment Act also introduced s 18D(1A) into the Act so that s 18D read, relevantly: - "Section 18D Extension of statutory warranties (1) A person who is a successor in title to a person entitled to the benefit of a statutory warranty under this Act is entitled to the same rights as the person's predecessor in title in respect of the statutory warranty. (1A) A person who is a non-contracting owner in relation to a contract to do residential building work on land is entitled (and is taken to have always been entitled) to the same rights as those that a party to the contract has in respect of a statutory warranty." 21As is clear from the language used in s 18D(1A), the subsection was intended to have retrospective operation.

The 2011 amendments 22By the Home Building Amendment Act 2011 ("the 2011 Amendment Act") s 3A(1) of the Act was slightly amended and a new s 3A(1A) was added as follows: - (1) For the purposes of this Act, ...a corporation on whose behalf residential building work is done in the circumstances set out in subsection (2) is a developer in relation to that residential building work. (1A) Residential building work done on land in the circumstances set out in subsection (2) is, for the purpose of determining who is a developer in relation to the work, deemed to have been done on behalf of the owner of the land (in addition to any person on whose behalf the work was actually done). Note. This makes the owner of the land a developer even if the work is actually done on behalf of another person (for example, on behalf of a party to a joint venture agreement with the owner for the development of the land). The other person on whose behalf the work is actually done is also a developer in relation to the work." (emphasis added; in sub-section (1) to show the amendment) 23Subsection 3A(2) remained unchanged. 24The 2011 Amendment Act also introduced a s 18C(2) as follows: - "For the purposes of this section, residential building work done on behalf of a developer is taken to have been done by the developer." 25Section 106 of the 2011 Amendment Act provided that the amendments were made "for the purpose of the avoidance of doubt" and accordingly, except as otherwise provided, applied to residential building work commenced or completed before the commencement of the amendment. 26However, the 2011 amendments did not apply to proceedings already commenced (s 107 of the 2011 Amendment Act). 27Accordingly, the 2011 amendments do not apply to these proceedings.

Did Metro agree to do the Work on behalf of Baron? 28The answer to this question depends on the proper construction of the Development Agreements.

Terms of the Development Agreement 29The Recitals to the Development Agreements stated that: - (a)Baron was the registered proprietor of the Property; (b)Metro had agreed to develop the "Project" on behalf of Baron; (c)Metro had engaged Baseline to construct the "Project"; and (d)Baron had appointed Metro to "undertake the project management, construction and development" of the "Project". 30"Project" was defined to mean: - "...the management of the approval process and the design and development of the [Property] by the constructions [sic] of the Works as set out in the Feasability [sic] and in Schedule 1." 31"Works" was defined to mean the construction of 111 residential units, certain retail space and the common property on the Property. 32The operative clauses were cl 2.1 and cl 2.2 by which: - (a)Baron appointed Metro to provide the "Services"; and (b)Metro agreed to "perform or procure" the Services and "any other duties and functions in relation to the Project agreed between the parties". 33The "Services" were those set out in Schedule 1 to the agreement which was in the following terms: - "In relation to the Project:- Under take the project to: - a. Engage such contractors as required; b. Advise the Owner from time to time of the Project; c. Liaise with council, consultants or any other person or entity in relation to the Project; d. Ensure all applications for rezoning and Development Consent council and approvals necessary from council and other relevant authorities are made in good time otherwise minimise delays in the progress of the Project; e. Effect all insurances necessary f. Monitor, approve, coordinate, manage, implement and review all documentation, Feasibility's and control procedures in relation to the project; g. Develop, prepare the administration and cost/times procedures to suit the Project requirements; h. Undertake all works required under this agreement; i. Monitor and comply with the terms and conditions of the Building Contract; j. Monitor and manage any environmental and industrial relation issues that my [sic] arise in respect of the works; k. Undertake all marketing promotion and sale of the project by appointing appropriate agents and insuring sales are made in accordance with the Feasibility; l. Undertake and perform all acts, matters and things that are reasonably necessary or incidental to any of the matter [sic] set out in this schedule". 34Pursuant to other clauses of the Development Agreements: - (a)Metro agreed that it would not perform any of the Services which required it to hold a licence under the Act, unless it held such a licence (cl 2.4); (b)Metro agreed it entered into the agreement as "head contractor" (cl 3.4) and agreed to perform its obligations under the agreement with the standard of skill, care and diligence expected of a reasonably competent "head contractor" (cl 3.1(c)); (c)Metro agreed to enter into all contracts and arrangements "in its own right" and be responsible for payments to be made under those contracts; such costs were described as "Development Costs" (cl 5.1); (d)Baron agreed to pay Metro "the Fee" (cl 3.5) which was any profit realised from the development after payment of an amount of $300,000 to a company called Newbart Investments Pty Ltd and $6 million to Baron "in consideration for its investment in the original property", together with certain "Approved Costs Overruns" and the Development Costs.

The proper construction of the Development Agreements 35Mr Roberts referred to Casa Maria Pty Ltd v Trend Properties Pty Ltd [1998] NSWCA 53 and Midori v Newkarna (Supreme Court of New South Wales, Coll J, 20 April 1994, unreported) and submitted that those cases stood for the propositions that: - (a)a contract may contemplate that work be carried out under a separate building contract with another builder but still itself be a contract to do residential building works; and (b)the true test is whether or not there is an enforceable agreement in the first contract to get the building works done. 36Mr Roberts submitted that a conventional building contract is one "to get the work done, more often than not by subcontractors". He pointed to s 6(1)(a) of the Act which provides that s 7 of the Act (which specifies, amongst other things, that a building contract must be in writing) applies to contracts under which the holder of a contractor licence undertakes "in person, or by others" residential building work. Thus, Mr Roberts submitted, the Act contemplates that a building contract to which the Act applies may provide for the work to be done by someone other than a party to the contract. 37These submissions may be correct, as a matter of generality. However, in my opinion, the answer to the question before me lies in the proper construction of the terms of these Development Agreements. 38Statements made in the context of differently worded agreements are of little, if any, assistance. 39There was no debate before me as to the principles to be applied in relation to the construction of commercial contracts. 40They were recently restated in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184. Bathurst CJ (with whom Macfarlan and Meagher JJA agreed) said (at [52]): - "The principles underlying the construction of written contracts are well established and it is not necessary to deal with them at length. A contract is to be construed by reference to what a reasonable person would understand by the language in which the parties have expressed their agreement having regard to the context in which the words appear and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphafarm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40]; International Air Transport Assn v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [53]. At least in the case of ambiguity, resort can be had to the surrounding circumstances known to the parties in interpreting the particular provision: Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 282 ALR 604." 41Under the Development Agreements, Metro agreed to provide the "Services". 42Schedule 1 of the Development Agreements provided that "in relation to the Project" Metro must "under take the project to" perform the various tasks specified in subparagraphs (a) to (l) of Schedule 1. 43The words "Project" and "project" are used in consecutive lines. That appears to me to be a typographical error; I understand the parties to mean "project" to have the same meaning as 'Project": see generally Lewison and Hughes, The Interpretation of Contracts in Australia, (2012) at [9.02]. 44I do not read cl 2.1 and Schedule 1 so as to impose upon Metro an obligation to "under take the project". That is because, in Schedule 1, the word "to" appears after the words "under take the project". In my opinion, a reasonable person would understand from this language that the parties intended Metro's obligations to be to perform the services in subparagraphs (a) to (l), and thereby "under take" "the Project"; and not to itself "under take the Project". 45None of those services constitute doing the building work itself. 46I accept, however, another reading of Schedule 1 is available, namely to read "to" as if it meant "by". If that were the better reading of Schedule 1, it would impose on Metro an obligation to undertake the Project "by" performing the enumerated services. However, this is not the reading of Schedule 1 that I favour. 47Even if I am wrong and Schedule 1 should be construed as I have set out in the preceding paragraph, further ambiguity arises by reason of the definition of "Project". 48That definition refers to the "management of the approval process" and the "design and development" of the Property and then adds, somewhat obscurely, "by the constructions of the Works". 49Those words can be read two ways; as either including in the definition of "Project" no more than obligations to manage the approval process and design and development of the land. Or they could be read as including a further obligation, namely to carry out one or both of those functions "by the construction" of the Works. 50There are two factors at play that may assist resolving these ambiguities. Unfortunately, they each point in opposite directions. 51The first is that Recital (d) (see [29] above) states that Baron had appointed Metro to undertake not only the project management and development of the Project but also the "construction" of the Project. 52The Recitals to a contract can be used as an aid in construction, at least to determine the meaning of an ambiguous operative provision: Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at [380]; and see Lewison, The Interpretation of Contracts, 5th ed (2011) at [10.13]; (there appears to be no corresponding reference in the Australian edition of this work). 53Recital (d) suggests that the parties contemplated that Metro was to "undertake ... construction" of the Project. However, I do not find the suggestion to be a strong one, especially in light of the fact that the immediately preceding recitals state that Metro has agreed to "develop" (not "construct") the Project on behalf of Baron and that Metro has engaged Baseline "to construct" the Project. I appreciate that Metro is described in the agreements as "head contractor" (see [34(b)] above), and that head contractors commonly engage subcontractors. Nonetheless, I do not consider recital (d), when read together with the earlier recitals, to be of great assistance in resolving the ambiguities to which I have referred. 54On the other, if the Development Agreements are to be construed as a contract by Metro to do residential building work, Metro, by entering into the contract, was in breach of s 4 of the Act as it did not hold a contractor licence as required by that section. 55That would be a strange result, especially in circumstances where, in cl 2.4 of the Development Agreements (see [34(a)] above), the parties have, in terms, addressed the requirements of the Act. In cl 2.4 Metro promised that it would not perform any work requiring a licence under the Act, unless it held such a licence. 56If a contract is ambiguous, the construction of a contract which results in the parties (or one of them) acting lawfully is to be preferred to a construction which results in the party or parties acting unlawfully: Global Network Services Pty Ltd v Legion Telecall Pty Ltd [2001] NSWCA 279 at [102] per Mason P citing with approval Lewison, The Interpretation of Contracts, 2nd ed (1997) at [6.09]; repeated in the 5th ed at [7.11] and in Lewison and Hughes at [7.10]. 57The construction for which Mr Roberts contended attributes to Metro an understanding that it should not, and a promise that it would not, perform any work requiring a licence under the Act unless licensed; but an intention to contract to do work requiring a licence without having such a licence, thereby putting itself in breach of the Act. That is, Mr Roberts' construction attributes to the parties an intention that Metro act unlawfully. 58It seems to me most unlikely that the parties so intended. This fortifies my conclusion that my reading of Schedule 1 set out at [44] above is the correct one. 59My conclusion is therefore that, by the Development Agreements, Metro did not agree to do residential building work.

Did Baseline do the Work "on behalf of" Baron? 60On the face of it, Mr Roberts' submission that, under the Building Contracts, Baseline did residential building work "on behalf of" Baron is inconsistent with the observations of Sackville AJA in Ace Woollahra (see [18] above). 61In Ace Woollahra, Sackville AJA (with whom Tobias and McColl JJA agreed) said that although the expression "on whose behalf" is capable of many meanings and, taken in isolation, could describe a non-contractual relationship: - "...there are good reasons for confining the expression 'on whose behalf' to the case where residential building work is undertaken by one party on a contractual basis for another party (as occurred in HIH Casualty and General Insurance Ltd v Jones [2000] NSWSC 359)." (at [52]) 62His Honour's reference to HIH v Jones (which dealt with a contract to do residential building work made between the parties whose interests were at play in that case) suggests that, when his Honour used the expression "work ... undertaken by one party on a contractual basis for another", his Honour had in mind work done by one party for another pursuant to a contract to do residential building work made between them. 63His Honour pointed to practical difficulties that would arise if, in the context where it appears in the Act, the expression "on whose behalf" could extend beyond such a case. His Honour said: - "How would a contractor, or his or her insurer, ascertain the identity of all persons on whose behalf, as a matter of fact and not merely contract, the residential building work was to be undertaken...[Counsel for the owners corporation in that case] suggested that the key points in the present case were that [the party equivalent to Baron in this case] was the registered proprietor of the...site, was intended to register the strata plan and was to share in the profits of the development. No doubt it would be feasible for a contractor to ascertain the registered proprietor of the land, but what of the other matters identified... And what if the work was not being carried out for the benefit of the registered proprietor but for a third party, such as a purchaser from a registered proprietor under a contract for sale not yet completed?" (at [53]) 64Mr Roberts submitted that the concerns that led Sackville AJA to express these opinions were removed by the introduction into the Act, by the 2010 Amendment Act, of s 18D(1A) (see [20] above). 65That subsection provides that a non-contracting owner (such as Baron) is, in relation to a contract to do residential work, entitled (and is taken to have always been entitled) to the same rights concerning statutory warranties as a party to the contract. 66It is common ground that the effect of the introduction of s 18D(1A) to the Act was to give Baron, and deem Baron always to have had, the same rights against Baseline for breach of statutory warranty as was enjoyed by Metro. 67It followed, Mr Roberts submitted, that the residential building work done by Baseline at the Property must also be deemed to have been done "on behalf of" Baron as "non-contracting owner".

Consideration 68The Owners Corporation can, as the immediate successor in title to Baron, enforce the statutory warranties against Baron if Baron is a "developer" (s 18C). Baron is a "developer" if it is the party "on whose behalf" Baseline did the Work (s 3A(1)). 69Applying the reasoning of Sackville AJA to the facts of this case, and leaving s 18D(1A) to one side, Baron is not a party "on whose behalf" Baseline did the Work because Baseline did not undertake that work "on a contractual basis" for Baron. Rather, Baseline undertook the work "on a contractual basis" for Metro. 70Section 18D(1A) has the effect that Baron (as a "non-contracting owner") is deemed always to have had "the same rights as those that a party to the contract" [that is, Metro] had against Baseline "in respect of a statutory warranty". 71Thus, Baron is, to this extent, deemed to be in a relationship with Baseline equivalent to a contractual relationship. That is, by operation of s 18D(1A), there is a statutorily created contractual relationship; or something equivalent thereto. 72If the statutorily created contractual relationship is deemed to always have existed between Baron and Baseline and if, accordingly, Baron is deemed always to have been entitled to enforce the statutory warranties against Baseline then, in my opinion, as a matter of ordinary language, it follows that Baseline must always have been carrying out the Work on behalf of Baron (as well as on behalf of Metro). Despite what I have said at [63], I see nothing in the reasoning of Sackville AJA to warrant coming to a different, or narrower conclusion. 73In those circumstances, the problem identified by Sackville AJA of identifying the person on whose behalf "as a matter of fact, and not merely as a matter of contract" (Ace Woollahra at [53]; see [63] above) the work was done does not arise. It is simply a matter of identifying the relevant "non-contracting owner". 74As Mr Roberts submitted, it would be anomalous if the 2010 Amendments did not have this effect. The result would be that a non-contracting owner (such as Baron) would be entitled to enforce statutory warranties against a builder (such as Baseline) with whom it had not contracted, but not be regarded as a party on whose behalf the residential building work was done; thus denying successors in title (such as the Owners Corporation) a right to enforce statutory warranties against it. An important object of the Act is to ensure that the statutory warranties accrue to the benefit of the owner of the land, and be transmissible to its successors in title. 75Mr Corsaro submitted that the 2010 amendments should not be construed as "retrospectively refiguring the relationship between the original land owner and the builder". For the reasons I have set out, I am not able to accept that submission. In my opinion, that is the effect of the 2010 amendments. 76My attention was drawn to the second reading speech given in respect of the 2010 amendments. 77The second reading speech makes clear that the 2010 Amendments were aimed at overcoming the effect of Ace Woollahra, especially so far as concerns actions by current owners of property against builders with whom those owners did not have a contractual relationship. 78I accept that the matter was put beyond all doubt by the 2011 amendments which inserted s 3A(1A) into the Act (see [22] above). If that subsection applied it would quite clear, as Mr Corsaro accepted, that Baseline was deemed to have done the Work "on behalf of" Baron. 79However, notwithstanding the further legislative clarification of the issue by the 2011 amendments (which, as I have said, were made "for the avoidance of doubt" - see [25] above), I think the matter was made sufficiently clear by the 2010 amendments. 80My conclusion is, therefore, that the Owners Corporation is entitled to the benefit of the statutory warranties against Baron.

Did Metro undertake procurement of the Work as agent for Baron? 81In view of the conclusion to which I have come concerning the preceding issue, it is not necessary for me to deal with the remaining issues. They were, in any event, only faintly pressed. I will deal with them briefly. 82I do not accept that Metro was acting as agent for Baron. 83Clause 3.4 of the Development Agreements provided, in terms, that neither Baron nor Metro were acting as agent of the other. 84Further, there is no suggestion in the Building Contracts that Metro was acting as agent for Baron. If it were, it could only be as agent for Baron as an undisclosed principal. However, the Building Contracts contained non-assignment clauses (for example, cl 16(a) in the Building Contract relevant to Stage 1). The doctrine of undisclosed principal cannot operate in the face of such clauses: see for example, Andrews v Nominal Defendant [1968] 3 NSWR 686 at 695 per Asprey JA; Australian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd (Supreme Court of New South Wales, Giles J, 14 October 1993, unreported) at 14.

Did Metro hold the promises given to it by Baseline as trustee for Baron? 85There is no evidence of any such trust. To the contrary, on 7 December 2001, Mr Philip Bart, a director of Metro swore a statutory declaration that Metro was not the trustee of any trust.

Conclusion 86I do not accept that, by the Development Agreements, Metro agreed to do the Work. Accordingly, I do not accept the Owners Corporation's submission that Metro agreed to do the Work "on behalf of" Baron. 87I also do not accept that Metro undertook procurement of the Work as agent for Baron or that Metro held the promises given to it by Baseline as trustee for Baron. 88However, I do accept that Baseline did the Work "on behalf of" Baron and that, accordingly, Baron is a "developer" for the purposes of s 3A(1) of the Act. 89It follows, as the Owners Corporation is an immediate successor in title to Baron for the purposes of s 18C of the Act, that the Owners Corporation is entitled to the benefit of the statutory warranties against Baron. 90I invite the parties to bring in short minutes to give effect to these reasons.

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: 24 April 2013

The Owners - Strata Plan No. 69567 v Baseline Constructions Pty Ltd

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