Waterbrook at Yowie Bay Pty Limited v Allianz

Corporations Act 2001 Corporations Law LEGISLATION CITED : Home Building Act 1984 Home Building Act 1989 Home Building Regulation 1997

Bellgrove v Eldridge (1954) 90 CLR 613 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 CASES CITED : FAI General Insurance v Gallagher [2000] NSWSC 453 Government Insurance Office of New South Wales v RJ Green & Lloyd Pty Ltd (1966) 114 CLR 437 Hadley v Baxendale (1854) 9 Ex 341

PARTIES : Waterbrook v Yowie Bay Pty Limited (Plaintiff) Allianz Australia Insurance Limited (Defendant)

COUNSEL : P F Liney / F F F Salama (Plaintiff) F C Corsaro SC / P J Bambagiotti (Defendant)

SOLICITORS : Mallesons Stephen Jaques (Plaintiff) HWL Ebsworth Lawyers (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

11 December 2008 ex tempore (revised 11 December 2008)

50037/08 WATERBROOK AT YOWIE BAY PTY LIMITED v ALLIANZ INSURANCE PTY LIMITED JUDGMENT 1 HIS HONOUR: The plaintiff (Waterbrook) is the owner of a retirement village at Yowie Bay (the village). The developer of the village was a company now known as Yowie Pty Ltd (the developer). The builder was a company now known as Reica Constructions Pty Ltd (the builder). The builder is in liquidation. Some of the builder's work was defective. Not all of the defects have been rectified. 2 The defendant (Allianz) is an insurer. It stands in the shoes of the insurer who had issued a builder's home warranty insurance policy (the policy) in respect of the builder's work. 3 The fundamental issues in these proceedings are:

(1) is Waterbrook, as a successor in title to the developer, entitled to indemnity under the policy for the reasonable cost of proper repairs?

(2) the extent, nature and cost of those repairs. The preliminary questions 4 The following questions have been ordered to be determined separately from and before the determination of all other questions in the proceedings: (1a) Whether the Plaintiff falls within the exclusion, from the definition of "Building Owner" of companies [or persons or companies] related within the meaning of the Corporations Law, to [the developer]. (1b) For this purpose, whether the words 'persons or' in the Policy exclusion are void by reason of non-compliance and/or inconsistency with the Home Building Act 1989 ("Act") and the Home Building Regulations made thereunder ("Regulation") at the time the Policy was issued. 2. Whether that part of Indemnity Limitation (9) of the Policy, which purports to exclude the Defendant's liability for defects which were reasonably visible at the time that the Plaintiff acquired the subject land and buildings, is void by reason of non-compliance and/or inconsistency with the Act and the Regulation at the time the Policy was issued. 3. Whether the allegation in paragraph 10.1(e) of the Further Amended List Response discloses an arguable defence as a matter of law (where "the circumstances" referred to therein were that the Plaintiff acquired the Property from Waterbrook Pty Ltd with knowledge of the existence, nature and extent of all, or substantially all, of the alleged defects). 4. Whether the Exclusion alleged in paragraph C9.3(e) of the Further Amended List Response is void by reason of non-compliance and/or inconsistency with the Act and the Regulation at the time the Policy was issued." Agreed facts 5 The parties tendered a statement of agreed facts. I have already summarised some of it. I set out, with immaterial changes, paragraphs 8 and 10 to 14: 8. At the time Waterbrook acquired the village, some of the defects the subject of the present proceedings were known to the Plaintiff and were reasonably visible. 10. The developer was a "developer who does the work", for the purposes of s3A of the Home Building Act 1984 (the HB Act). 11. The developer was "a developer who does residential building work", for the purposes of sub-clause (a) to the definition of "Building Owner" in the policy. 12. Waterbrook is the developer's "successor in title", for the purposes of s 18D and 99 of the Act and the definition of "Building Owner" in the policy. 13. At all material times, Keven Joseph Ryan was and remains a director of the developer. 14. Since about 4 August 2005, Kevin Joseph Ryan has been a director of Waterbrook.

The legislative scheme 6 Before I turn to the questions, I shall deal with the legislative scheme as it stood at the relevant time. The parties provided the Court with what they agreed were copies of relevant legislation in the terms that applied when the builder carried out the work of constructing the village for the developer. It was common ground that the work was residential building work for the purposes of the HB Act, as it then stood. 7 In broad outline, the HB Act (so far as it is of present relevance) sought to ensure that: (1) residential building work, as defined, was performed only by licensed contractors; (2) contracts for the performance of residential building work were in writing; (3) there were implied into such contracts certain warranties; (4) those warranties were supported by insurance; (5) the insurance afforded certain minimum indemnities; and (6) the benefit of warranties and insurers enured, although with some exceptions, for the benefit of immediate and mediate successors in title to the person who had been in contract with the builder. 8 The HB Act made it clear that neither statutory warranties nor statutory insurance rights could be excluded or restricted. 9 Section 18B set out the implied statutory warranties. Since their precise terms do not require consideration, I shall not set out the section. It is sufficient to note that the statutory warranties dealt, among others, with the following topics:

(1) doing work in a proper and workman like manner; (2) using good and suitable materials; (3) ensuring that dwellings will be reasonably fit for occupation as dwellings; and (4) that work and materials will be reasonably fit for any specified purpose made known to the builder. 10 Section 3A extended the operation of the HB Act to "developers" as defined: 3A Application of provisions to developers

(1) For the purposes of this Act, an individual, a partnership or a corporation on whose behalf residential building work is done in the circumstances set out in subsection (2) is a developer who does the work.

(2) The circumstances are: (a) the residential building work is done in connection with an existing or proposed dwelling in a building or residential development where 4 or more of the existing or proposed dwellings are or will be owned by the individual, partnership or corporation, or (b) the residential building work is done in connection with an existing or proposed retirement village or accommodation specially designed for the disabled where all of the residential units are or will be owned by the individual, partnership or corporation. (3) A company that owns a building under a company title scheme is not a developer for the purposes of this Act. 11 Section 18D extends the benefit of the statutory warranties to successors in title: 18D Extension of statutory warranties

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, except for work and materials in respect of which the person's predecessor has enforced the warranty. 12 Section 92 imposed the requirement approximate for residential building work to be insured:

(1) A person must not do residential building work under a contract unless:

(a) a contract of insurance that complies with this Act is in force in relation to that work, and (b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.

(2) A person must not demand or receive a payment under a contract for residential building work (whether as a deposit or other payment and whether or not work under the contract has commenced) from any other party to the contract unless: (a) a contract of insurance that complies with this Act is in force in relation to that work, and (b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract. Maximum penalty: 100 penalty units.

(3) This section does not apply if the contract price does not exceed $5,000 or (if the contract price is not known) the reasonable market cost of the labour and materials involved does not exceed $5,000. (4) If the same parties enter into two or more contracts to carry out work in stages, the contract price for the purposes of subsection (3) is taken to be the sum of the contract prices under each of the contracts.

(5) The regulations may prescribe another amount for the purposes of subsection (3) and an amount so prescribed is to apply in the place of the amount referred to in that subsection. (6) To avoid doubt, this section extends to residential building work that is also owner-builder work. 13 Section 99 prescribed the basic content of insurance: 99 Requirements for insurance for residential building work

A contract of insurance in relation to residential building work required by section 92 must insure:

(a) a person on whose behalf the work is being done against the risk of loss resulting from the non-completion of the work because of the insolvency or death of the contractor or because of the fact that, after due search and inquiry, the contractor cannot be found, and (b) a person on whose behalf the work is being done and the person's successors in title against the risk of loss arising from a breach of a statutory warranty in respect of the work. 14 Paragraph (b) is of present significance. 15 Section 102 set out some "general requirements, including:

(1) This section applies to all contracts of insurance required to be entered into by or under this Part. …

(4) Any limitations on liability under the contract of insurance must comply with any requirements of the regulations.

(5) The contract of insurance must comply with any other requirements of the regulations.

16 Section 103D emphasised that insurance rights cannot be restricted or removed:

A provision of a contract or another agreement that purports to restrict or remove the rights of a person under this Part is void.

17 Section 103C authorised the making of regulations relating to insurance: 103C Regulations

(1) The Governor may make regulations for or with respect to requirements for insurance required to be entered into under this Part. (2) Without limiting subsection (1), regulations may be made for or with respect to the following: (a) limitations on liability, (b) beneficiaries under the contract of insurance, (c) losses indemnified, (d) the period within which a claim must be made, (e) subrogation, (f) when an insurance claim is taken to have been refused, (g) the manner of determining the maximum amount of insurance cover, (h) when work is complete, (i) the making of appeals against decisions of insurers, including the time within which appeals may be made. 18 The Home Building Regulation 1997 (the HB Regulation) dealt with a number of topics. Of present relevance, Part 5 dealt with insurance. 19 Clause 42 said who must, and who need not, be insured:

(1) An insurance contract must provide that the beneficiaries under the contract are:

(a) a person: (i) on whose behalf residential building work covered by the contract is done or is to be done, or (ii) to whom a kit home covered by the contract is supplied or is proposed to be supplied, or (iii) who is a purchaser of land on which owner-builder work, or work required by section 95 or 96 of the Act to be insured, and covered by the contract, is done, or (b) a successor in title to any person referred to in paragraph (a) (i), (ii) or (iii).

(2) The following persons are not required to be beneficiaries under an insurance contract: (a) a developer who does residential building work, (b) a person who does residential building work other than under a contract, (c) a holder of a contractor licence who or which carried out residential building work, (d) companies related, within the meaning of the Corporations Law, to any corporate person referred to in paragraph (a), (b) or (c). (3) Nothing in this clause prevents a person referred to in subclause (2) from being a beneficiary under an insurance contract. (4) For the purposes of this clause, the owner or owners of common property the subject of work referred to in section 95 or 96 of the Act are taken to be purchasers of the land on which the common property is situated. 20 It is common ground that the developer was "a developer who does residential building work" in respect of the village. That follows from para 10 of the statement of agreed facts and the terms of s 3A of the HB Act. 21 Clause 43 specified what are in effect the minimum indemnities to be offered: 43 Losses indemnified (1) An insurance contract must indemnify beneficiaries under the insurance contract for the following losses or damage in respect of residential building work covered by the insurance contract:

(a) loss or damage resulting from non-completion of the work because of the insolvency, death of the contractor or because, after due search and inquiry, the contractor cannot be found, (b) loss or damage arising from a breach of a statutory warranty. (2) An insurance contract must indemnify beneficiaries under the contract for the following losses or damage in respect of the supply of a kit home the subject of the contract: (a) loss or damage resulting from the non-supply of the kit home because of the insolvency, death or disappearance of the supplier or because, after due search and inquiry, the supplier cannot be found,

(b) loss or damage resulting from any of the following events:

(i) the materials and components used in the kit home not being good or suitable for the purpose for which they were used, (ii) the design of the kit home being faulty.

(3) Without limiting subclause (1) or (2), an insurance contract must indemnify a beneficiary for the following loss or damage: (a) loss or damage resulting from faulty design, where the design was provided by the contractor or supplier, or

(b) loss or damage resulting from non-completion of the work because of early termination of the contract for the work because of the contractor's or supplier's wrongful failure or refusal to complete the work or supply, or (c) the cost of alternative accommodation, removal and storage costs reasonably and necessarily incurred as a result of an event referred to in subclause (1) or (2), or

(d) loss of deposit or progress payment due to an event referred to in subclause (1) or (2). (4) The insurance contract must state that the risks indemnified include the acts and omissions of all persons contracted by the contractor, supplier, owner-builder or other person to perform the work resulting in loss or damage of a kind referred to in this clause. 22 Clause 44 made provision, in terms of no present relevance, for limited exclusions of liability in respect of deposits. 23 Clause 45 authorised other specified exclusions of liability: 45 Limitations on liability and cover (1) An insurance contract may contain the following limitations on liability under the contract: (a) the contract may limit claims that may otherwise arise under the building contract in the nature of liquidated damages for delay or damages for delay provided that any such limitation must not extend to any increase in rectification costs caused by the effluxion of time, (b) if the contract is required to be entered into under section 95 of the Act, the contract may provide that the insurer is not liable in respect of any defect that is referred to in any report on the owner-builder work required by the insurer to be obtained before the insurance contract was entered into,

(c) the contract may exclude a claim for such loss or damage as could be reasonably expected to result from fair wear and tear of the building work covered by the contract or failure by the insured to maintain the building work; (d) the contract may exclude a claim in relation to a defect in, or the repair of damage to, structural elements in the non-residential part of a building that supports or gives access to the residential part, unless it is a defect or damage that adversely affects the structure of the residential part or the access to it,

(e) the contract may exclude a claim in relation to damage caused by the normal drying out of the building work or kit home components concerned, if the damage has occurred despite the contractor or supplier taking all reasonable precautions in allowing for the normal drying out when carrying out the building work, or in preparing the assembly tolerances of the kit home,

(f) the contract may exclude a claim in relation to damage due to or made worse by the failure of any beneficiary to take reasonable and timely action to minimise the damage,

(g) the contract may exclude a claim in relation to an appliance or apparatus (such as a dishwasher or air conditioning unit) if the claim is made after the expiry of the manufacturer's warranty period for the appliance or apparatus or, if there is no warranty period, outside the reasonable lifetime of the appliance or apparatus, (h) the contract may exclude a claim in relation to damage to work or materials that is made outside the reasonable lifetime of the work or materials or the manufacturer's warranty period for the materials,

(i) the contract may exclude a claim in relation to a defect due to a faulty design provided by a beneficiary or a previous owner.

Relevant provisions of the Corporations Law 24 The parties contended variously that some one or more of the following provisions of the Corporations Law (the Law) were relevant: (1) the definitions of "related body corporate", "related entity" and "related party" in s 9; (2) section 50; and (3) section 243F. 25 I set out those provisions: related body corporate , in relation to a body corporate, means a body corporate that is related to the first-mentioned body by virtue of section 50. related entity, in relation to a body corporate, means any of the following: (a) a promoter of the body; (b) a relative, or de facto spouse, of such a promoter; (c) a relative of a spouse, or a de facto spouse, of such a promoter; (d) a director or member of the body or of a related body corporate; (e) a relative, or de facto spouse, of such a director or member; (f) a relative of a spouse, or of a de facto spouse, of such a director or member; (g) a body corporate that is related to the first-mentioned body; (h) a beneficiary under a trust of which the first-mentioned body is or has at any time been a trustee; (i) a relative, or de facto spouse, of such a beneficiary; (j) a relative of a spouse, or of a de factor spouse, of such a beneficiary; (k) a body corporate one of whose directors is also a director of the first-mentioned body; (l) a trustee of a trust under which a person is a beneficiary, where the person is a related entity of the first-mentioned body because of any other application or applications of this definition.

related party has in Chapter E the meaning given by section 243F. 50 Related bodies corporate (1) Where a body corporate is: (a) a holding company of another body corporate; or (b) a subsidiary of another body corporate; or (c) a subsidiary of a holding company of another body corporate; the first-mentioned body and the other body are related to each other. Question 1 (a): related companies The parties' submissions 26 Mr PF Liney of counsel, who appeared with Mr FFF Salama of counsel for Waterbrook, submitted that companies were related for the purposes of cl 42(2)(d) of the HB Regulation only if they were related bodies corporate within s 50 of the Law, and not otherwise. He supported that submission in two principal ways:

(1) by analysis of the language of the HB Regulation; and (2) by an examination of the history of the insurance provisions from time to time set out in the HB Act and Regulation, and their predecessors and successors. 27 Mr FC Corsaro of Senior Counsel, who appeared with Mr PJ Bambagiotti of counsel for Allianz, submitted that it was sufficient if any one of the three categories of relationship to which the Law referred was applicable. He too relied on an analysis of the language of the HB Regulation, considered in conjunction with what, he submitted, was its purpose. 28 Both counsel referred to what they said were extraordinary and unintended consequences of the construction advanced by the other.

Decision 29 The resolution of question 1 (a) requires close attention to be given to the wording of cl 42(2)(d) of the HB Regulation. The classes of those who need not be beneficiaries under what it is convenient to call a complying policy include "companies related, within the meaning of the Corporations Law, to any corporate person referred to in" a preceding paragraph. 30 That may be rephrased as "companies related in a certain way to any corporate person of a certain kind," or as "companies related in a certain way to any company of a certain kind". At the heart of the paragraph is the concept of one company's being related to another, i.e. of two or more companies being related companies or, in the language of the Law, related bodies corporate. 31 Section 50 is the only provision of the Law that deals in terms with the question of when one body corporate is related to another. It is the only provision of the Law that says in terms when it is that one body corporate is related to another. The other provisions to which reference was made do not, in terms, address that question or its answer. 32 The definition of related entity in s 9 does not use the word "related" or any of its cognate forms. Nor does the definition of related party. The word "related" appears only in the defined term, not otherwise; specifically, not in the definition. 33 It follows that s 50 is the provision of the Law that, for the purposes of cl 42(2)(d) of the HB Regulation, defined the circumstances in which one company is related to another. 34 It would be strange if the drafter of the HB Regulation intended to avoid that obvious referent, and to use instead other provisions contained in the Law, directed to very limited purposes, most of which provisions could have no possible relevance to the factual situation with which cl 42(2)(d) is concerned. 35 As to the former point (limited purposes): the definition of related entity seems to have been used only in ss 486A, 588FH and 600A of the Law. The definition of related party was relevant only for the purposes of chapter 2E. 36 As to the latter point (irrelevant definitions): most of the paragraphs in the definitions of related entity and related party concern natural persons, not "corporate persons", and thus can have no relevance whatsoever for the purposes of clause 42(2)(d). That paragraph is concerned only to state when one company is taken to be related to one other. Further, the definition of related party applies only in the case of public companies. 37 Question 1 (a) should be answered "no". Question 1 (b): "Person or"

The definition of "Building Owner" 38 The policy offered indemnity, subject to its terms, to "the Building Owner". That expression was defined as follows: "Building Owner" means 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) a person who does residential building work other than under a contract; (c) the holder of a license who or which carried out residential building work; (d) persons or companies related, within the meaning of the Corporations Law, to any corporate person referred to in subclauses (a), (b) or (c) of this definition The parties' submissions 39 Mr Liney submitted that the words "persons or" in para (d) of the exclusion within the definition were inconsistent with what was permitted by cl 42(2)(d), and thus void by the operation of s 103D (read in conjunction with s 102(4)) of the HB Act. 40 Mr Corsaro appeared to accept that the words in question went too far. See para 14 of his outline submissions: 14. Sub-clause (d) of the definition of "Building Owner" does not precisely mirror cl 42(2)(d) of the Regulation. It cannot operate to exclude natural persons, even if they are "related" to "corporate persons" coming within cl 42(2)(a), (b) or (c) of the Regulation.

41 However, Mr Corsaro submitted, that was irrelevant in this case. Thus, he submitted, the question should not be answered. Decision 42 It is clear that the purported exclusion of "persons" in para (d) is inconsistent with cl 42 of the HB Regulation. 43 A successor in title to a developer who has done residential building work (through the operation of s 3A of the HB Act) is a person within cl 42(1)(b) of the HB Regulation. That is because the developer was the person on whose behalf that residential building work had been done for the purposes of cl 42(1)(a)(i). Clause 42(2)(d) authorises only the exclusion of companies that are related to the developer. It does not authorise the exclusion of natural persons. 44 It follows that the words "persons or" are an impermissible limitation on the class of those entitled to indemnity. 45 For reasons that I give in dealings with question 2, I think that the appropriate course is to answer question 1 (b), and not to allow the contractually authorised process of deletion to occur. Thus, since the question was posed and argued, it should be answered. The answer is "yes". Question 2: Reasonably visible defects

The relevant limitation 46 Clause (9) of the "Indemnity Limitations" set out in the policy reads as follows: (9) The Insurer shall not be liable for any claim for breach of a statutory warranty under the Building Owners Indemnity subclause 2 for work or materials in respect of which a predecessor in title to the land has enforced the warranty; or for any defects in the work which would have been reasonably visible at the time any successor in title acquired the dwelling. The parties' submissions 47 Mr Liney submitted that cl (9) was an impermissible restriction of the indemnity required to be provided under a complying policy. That indemnity, he submitted, was spelt out (relevantly) by s 99(b) of the HB Act and cl 43(1)(b) of the HB Regulation: indemnity for loss or damage arising from a breach of statutory warranty.

48 Mr Liney submitted that the prima facie measure of loss for breach of a warranty in a building contract was the cost of necessary and reasonable work required to make the building conform to the contract, together with consequential loss. He relied on Bellgrove v Eldridge (1954) 90 CLR 613. Mr Liney submitted that, as this was so for a party in contract with the builder, so it was also by s 18D the measure of a successor's entitlement, and the measure of indemnity under s 99(b) and cl 43 (1)(b). 49 Mr Corsaro submitted that loss or damage arising from defective workmanship was pure economic loss, and that it was necessary for a successor to show that it was unaware of the loss when it took title to the building. If a successor knew or ought to have known of the defects then, Mr Corsaro submitted, the true and only effective course of its loss was the decision to buy. Thus, Mr Corsaro submitted, cl (9) did no more than recognise what in any event a successor must show, to be entitled to indemnity. It followed, Mr Corsaro submitted, that cl (9) could not be inconsistent with the statutory entitlement to indemnity. Decision 50 Of concern in the form of this and the following questions, is that they are asked in a context devoid of all but the barest minimum of factual content. But causation is a question of fact, and so for that matter the question of remoteness (subject perhaps to a limiting issue: is a particular head or item of loss too remote in law to be recoverable?). 51 However, since the answer that I have given to question 1 (a) (should that answer stand) means that all questions of damages will likely be referred out, it is desirable that I deal with questions 2 to 4, so far as I can, at least at the level of principle. 52 A contract of insurance is required to provide (subject to permitted exclusions and limitations) indemnity, to a person on whose behalf residential building work is done and that person's successors in title, against the risk of loss arising from a breach of statutory warranty (s 99 (b) of the HB Act). To carry out that purpose, the contract of insurance must indemnify "beneficiaries" under it for specified losses or damage in respect of residential building work (see in particular the introductory words of cl 43(1) of the HB Regulation). The specified losses or damage include loss or damage arising from a breach of a statutory warranty (cl 42(1)(b)). 53 The term "beneficiary" is defined (with some circularity) in cl 39(1) of the HB Regulation as "a person entitled to claim a benefit under an insurance contract". Thus, it includes, without differentiation, both the person for whom residential building work is done, (usually, the person in contract with the builder, who may be called for convenience the original owner) and that person's successors in title. That lack of differentiation reflects s 18D of the HB Act. That section puts a successor in title in the same position, in relation to the benefit of the statutory warranties, as the original owner. 54 There is no doubt as to the measure of damages recoverable by the original owner for defective work: see Bellgrove The clear intention of s 18D is that the entitlement of successors should be no less. The clear intention of s 99(b), amplified by cl 43(1)(b), is that the policy should respond alike and without differentiation to a claim by either. 55 That approach is made clear by the concluding words of s 18D, which restricts a successor's rights only to the extent that the original owner has enforced the warranty. It is supported also by cl 45(b), which sets out one circumstance - the only one - in which a contract of insurance may exclude liability for defects known to a successor. That paragraph has no application in this case. 56 The phrase "loss or damage arising from a breach of a statutory warranty" suggests the first limb in Hadley v Baxendale (1854) 9 Ex 341 at 354; 156 ER 145 at 151: "damages...such as may fairly and reasonably be considered [as] arising naturally, according to the usual course of things, from such breach of contract itself". If indeed the legislature had that analogue in mind then, as I have said, the measure of damages is to be assessed in accordance with Bellgrove. 57 Alternatively, if the words "arising from" are to be considered free of any historical baggage, it is clear that they denote no narrow test of proximity or causality. The test that those words pose may indeed be wider, or less demanding, than the test posed by the words "caused by". See Barwick CJ in Government Insurance Office of New South Wales v RJ Green and Lloyd Pty Ltd (1966) 114 CLR 437 at 442 - 443. I acknowledge that his Honour was speaking of a composite phrase - "caused by or arising out of" - occurring in a different statutory context, and that it is always necessary to pay close attention to the particular context in which words occur and the objective purpose for which they are used. It is sometimes difficult, and often dangerous, to transpose the judicial elucidation of a particular phrase in a particular context to the same phrase in an entirely different context. 58 In the context of the HB Act and the HB Regulation - a legislative scheme intended to provide significant rights to consumers in an attempt to redress the notorious problems arising from shoddy work performed by bankrupt builders - the words "arising out of" should not be construed narrowly. 59 Thus, the test of causation denoted by the words "arising out of" is at least as wide as that found in the first limb of Hadley v Baxendale. That conclusion is sufficient to dispose of question 2, because (in conjunction with what I have said as to s 18D and the lack of differentiation between the rights of original owners on the one hand and of successors on the other) it is plain that some a priori limitation of the kind posed by clause (9) cannot be supported. Such a limitation is inconsistent with s 99(b) and cl 43(1)(b), at least to the extent that, in its operation, it would exclude recovery of loss or damage that, as a matter of fact, can be said to arise from a breach of statutory warranty. 60 There is a possible alternative path to the same conclusion. In FAI General Insurance v Gallagher [2000] NSWSC 453, Windeyer J said at [11] that the only limitations on liability that could be included in a complying contract were those expressly set out in cl 45 of the HB Regulation. That followed, his Honour said, from s 102 (4) of the HB Act read together with cl 45. 61 Mr Corsaro submitted that his Honour's observation was obiter, and should not be followed. Mr Liney supported his Honour's decision.

62 It is correct to say that his Honour's observations at [11] were obiter. His Honour decided the case on the basis that the provision of the particular insurance contract with which he was concerned was not a limitation for the purposes of cl 45. Thus, it was unnecessary to consider whether it was a limitation authorised by cl 45, let alone whether only limitations expressly authorised by cl 45 were allowable. I add that cl 44 of the HB Regulation may also be seen to permit some derogation from the indemnity available; but that clause was not relevant in Gallagher and is not relevant in this case. 63 In my view, what his Honour said finds support in the language of s 102 (4), and in the evident policy that there should be available to beneficiaries a legislated minimum entitlement to indemnity. I do not regard the relative liberalisation (more accurately, privatisation) of the statutory insurance regime which undoubtedly the 1997 form of the HB Regulation and the amendments effected in 1996 to the HB Act, were intended to achieve as requiring a different approach. The intention was to open up the relevant field of insurance to private enterprise, and to do away with the government monopoly. It was not to diminish the minimum entitlement to indemnity. 64 Thus, were it necessary to do so, I would conclude that the answer that I think should be given to question 2, can be supported also by the reasoning of Windeyer J in Gallagher. 65 The question which arises from what I have just said is whether cl (9) is void only to the extent that it purports to exclude loss or damage that can be said, as a matter of fact, to arise from a breach of a statutory warranty; or whether the clause should be read down. General condition (1) of the policy provides as follows:

(1) The indemnity provided to the Building Owner complies with the Act and if any term of this policy conflicts or is inconsistent with the Act then this policy shall be read and be enforceable as if it complies with the 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. 66 The better approach, I think, is to apply s 103D. That section applies not only to provisions of a contract etc that in fact restrict or remove rights. It applies to such provisions that purport to restrict or remove rights. On any view, if my conclusion as to cl (9) is correct, it purports to restrict or remove rights. It purports to do so even though, because it does so, it may be read down or read out of the policy. 67 Further, in this context, the offending words are not really susceptible of being read down in any way that leaves a meaningful residue with work to do. In truth, what would be required is substantive redrafting. Deletion is no more than a contractual alternative to statutory avoidance. To eliminate doubt, the statute should be allowed to do its work. The question that has been posed should be answered "yes". 68 In giving that answer, I wish to make it clear that the answer does not prevent any referee from finding that, in respect of any particular defect or head of loss, damages and indemnity are not available because on the facts, the true and only effective cause for that loss was Waterbrook's decision to acquire the village (or, adapting the language of the HB Act and the HB Regulation, that the underlying breach of warranty was not in fact an effective cause of the loss). My answer means only that the result does not follow automatically, or a priori, by operation of clause (9) of the Indemnity Limitations. Question 3: known defects 69 To make sense of this question, I set out para 10.1 (e) of the further amended list response:

(e) in those circumstances the Plaintiff did not suffer any "loss or damage" by virtue of the existence of the alleged defects in the Property and "loss or damage", if any, was loss and damage suffered not by the Plaintiff, but by Waterbrook Pty Ltd; 70 This question raises the problem to which I referred at the outset of my reasons for decision on question 2. It raises an additional problem. That additional problem flows from the parenthesised definition of "circumstances" in the question. The result of that somewhat artificial definition is that the question does not reflect the whole of any issue. A negative answer to the question would not of itself quell the controversy raised by para 10.1 (e). 71 That having been said, the question was raised and argued. In substance, the parties' submissions reflected (with necessary variations) what was put as to question 2. In those circumstances, I think that I should deal with question 3. 72 The reasons that I have given in relation to question 2 mean that question 3 should be answered "no". It is unnecessary to repeat them. It is, however, necessary to make plain that the answer to question 3 is subject, in substance, to the qualification (with all appropriate changes made) set out in respect of the answer to question 2. Question 4: consequential loss 73 Exclusion (10) reads as follows: The insurer shall not be liable for any claim for loss or damage: …

(10) for loss of use and/or consequential loss of any other kind arising directly or indirectly out of any event listed in the Building Owners indemnity, except as provided in subclause (5);

The parties' submission 74 Mr Liney submitted that consequential loss was in principle recoverable: Bellgrove at 617 - 618. Thus, he submitted, an exclusion of all consequential loss was impermissible. 75 Mr Corsaro submitted that exclusion (10) was not inconsistent with, and did not limit or annul the effect of, the extent of indemnity required to be given. He submitted that consequential loss did not arise from a breach of statutory (or any other) warranty. Decision 76 It is clear from Bellgrove that damages for defective work and materials, in the context of a building contract, may include consequential loss. The High Court said in Bellgrove at 617 - 618 (approving a statement in the then current - 7th - edition of Hudson on Building Contracts) that the measure of damages recoverable for breach of a building contract was the cost of making the work conform to the contract together with consequential loss. Hudson instanced loss of profits or earnings as an example of consequential loss. As the Court pointed out, that prima facie measure is subject to the qualifications not only that the work must be necessary to produce conformity with the contract but also that it must be reasonable to carry out that work. 77 In Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26, Nettle JA (with whom Ashley and Dodds-Streeton JJA agreed) said at [88] that some "consequential loss" may well fall within the first limb of Hadley v Baxendale. 78 Again, the question in substance is whether some a priori limitation on the entitlement to indemnity is sustainable. In my view, it is not. On the authority of the decisions to which I have referred:

(1) the measure of damages is that laid down in Bellgrove (of course, with the limitation also there laid down); (2) that measure reflects the first limb in Hadley v Baxendale ; (3) those damages may include consequential loss; and (4) if the statutory cause test of causality is wider (as I have indicated above may be the case) than the test posed by the first limb of Hadley v Baxendale , the same conclusion applies. 79 It follows that a limitation that excludes all consequential loss is inconsistent with the full statutory entitlement to indemnity. For the reasons given in relation to question 2, the appropriate course is to give the answer required by that conclusion: "Yes". 80 Again, I stress the answer does not prevent a referee from finding, in respect of any head or item of loss claimed, that recoverability should be denied because in fact that loss was not caused by, or is too remote from, the underlying breach of statutory warranty. Orders 81 I make the following orders:

(1) Direct that the answers to the questions be recorded. (2) Stand the proceedings into the directions list on 19 December 2008. (3) Order that the exhibits on the hearing of the separate questions be retained for 28 days and thereafter dealt with in accordance with the rules. 82 I will hear the parties on costs.

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