The Owners – Strata Plan No 89074 v Ceerose Pty Ltd

1. [1]

   HER HONOUR: This judgment concerns the adoption of a referee’s report. The proceedings concern a claim by the plaintiff (the owner) of a residential building for loss and damage caused by breach of the statutory warranties in s 18B of the Home Building Act 1989 (NSW). The defendants are the builder and developer.

2. [2]

   The owner seeks the adoption of two referee’s reports – the first report being in respect of liability and the second report in respect of quantum – under r 20.24(1)(a) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR). On the basis of these reports, the owner also seeks judgment in the amount of $1,962,883. The defendants oppose adoption of the reports on multiple grounds which were, essentially, marshalled into four topics:

3. [3]

   The parties relied on affidavits by their respective solicitors, Hamish Geddes and Su Johnson. A vast amount of documentary material was tendered. In sum, I was provided with three (overlapping, partially cross-referenced) sets of documentary materials totalling some 12,000 pages (25 folders). It took one day of judicial time just to collate and reconcile these materials. In addition, I received four ‘rounds’ of submissions and notes, which added up to some 200 pages (when properly formatted). It is not possible to set out the swathes of submissions, in particular, by the defendants.

4. [4]

   The proceedings appear to have been conducted in the same manner before the referee. Given the quantum of the judgment now sought, these proceedings appear to have been the antithesis of “just, quick and cheap”: cf s 56(1), Civil Procedure Act 2005 (NSW). Before turning to the particular points raised by the defendants, it is worth bearing in mind how and why the Court refers matters to a referee in the first place.

Referrals and adoption of referee’s report

1. [5]

   The Court may make orders for reference to a referee appointed by the Court for inquiry and report on the whole of the proceedings or a question arising in the proceedings: r 20.14(1), UCPR. The discretion to refer matters to a referee “must be exercised in accordance with the dictates of s 56(1) of the CPA, namely, the facilitation of the just, quick and cheap resolution of the real issues in the proceedings”: Rodriguez & Sons Pty Limited v Queensland Bulk Water Supply Authority (t/as Seqwater) (No 25) [2020] NSWSC 1544 at [17] (Beech-Jones J). For example, in Cave v Allen Jack and Cottier Pty Ltd [2014] NSWSC 1365, Campbell J considered that the “overriding purpose” would be better advanced by referring the whole of a building defects case to a referee, given the relative speed with which a referee could hear the case, and the relative flexibility and informality of the referee procedure, which may better define the issues, lead to a materially shorter hearing and save all parties significant legal costs: at [17].

2. [6]

   As Rogers CJ Comm D explained in Telecomputing PCS Pty Ltd v Bridge Wholesale Acceptance Corporation (Aust) Ltd (1991) 24 NSWLR 513 at 517, building disputes are a “prime example” of matters sent to referees for inquiry and report, where the question requires technical expertise and where a detailed examination may be required of large numbers of items. His Honour noted that a report from a person expert in the subject should be able to be produced more quickly and at less cost than before the Court, including where “It is simply impossible to make available a judicial officer with the time available to check hundreds, possibly thousands, of disputed invoices, building items, or such like”: at 517.

3. [7]

   Annexure 2 to Practice Note SC Eq 3, “Supreme Court Equity Division – Commercial List and Technology and Construction List”, contains the Usual Order for Reference, including that, subject to paras 4.2 and 4.3 of the usual order, the provisions of r 20.20 of UCPR “shall apply to the conduct of proceedings under the reference”: para 4.1. Rule 20.20(2) of the UCPR provides: (emphasis added)

4. [8]

   This is noteworthy, where many of the defendants’ submissions were based on the rules of evidence, with which the referee was not bound.

5. [9]

   Further, para 4.3 of the Usual Order for Reference provides that the referee is directed to “consider and implement such manner of conducting proceedings under the reference as will, without undue formality or delay, enable a just determination to be made including, if the referee thinks fit”: making inquiries by telephone; inspecting the site or, plant and equipment; and communicating with the experts retained by the parties. That is, the Usual Order for Reference envisages that the referee may further ‘streamline’ their task in a manner conducive to the just, quick and cheap conclusion of a referral from Commercial List and Technology and Construction List proceedings.

6. [10]

   As referees are not officers of the Court, their reports have no legal consequence unless and until they are adopted by the Court: Xuereb v Viola (1989) 18 NSWLR 453 at 465-6 (Cole J). Once the referee’s report is to hand, r 20.24(1) of the UCPR provides:

7. [11]

   In Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2005] NSWSC 784, McDougall J distilled into 15 principles the approach to be taken when determining whether to adopt or reject a referee’s report: at [7]. As McDougall J later noted in Harris v Morabito Holdings Pty Ltd [2018] NSWSC 912, these 15 points are not to be approached as a checklist, the application of which will provide in all cases an answer to the exercise of the discretion; they provide a general guide as to how the adoption of a referee’s report should be approached: at [13]. Of these 15 principles, the following are pertinent to the issues raised by the defendants, from Chocolate Factory at [7]:

8. [12]

   In Woolf v 52 Birriga Road Pty Ltd [2012] NSWSC 921, Beech-Jones J also observed at [29]:

9. [13]

   These observations have particular resonance in this case, where the proceedings have gone on far too long and the quantum of the amounts with which the defendants take issue are, in some instances, as little as $1,615.

10. [14]

    Further, the same features of a proceeding which make it suitable for referral – being a plethora of matters of detail which it is not practical for a judicial officer to consider – make it “simply impossible to make available a judicial officer with the time available” (Telecomputing v Bridge WAC) to check the detail underlying a referee’s report, as opposed to considering specific and significant problems carefully identified by circumspect counsel. As a rule of thumb, reproducing the submissions made to the referee on an adoption hearing is of little or no assistance to the Court.

The defects claim

1. [15]

   In 2010 and 2012, the developer entered into building contracts with the builder to construct a 16-storey building with 19 apartments, one commercial lot and five levels of basement car parking in Elizabeth Street, Sydney. In 2013, the strata plan was registered. A final occupation certificate was issued in 2014. In 2016, the owner commenced these proceedings in the New South Wales Civil and Administrative Tribunal (NCAT).

2. [16]

   The proceedings were transferred to this Court in 2017. The proceedings have been before this Court on 52 occasions. On the first 17 occasions, the proceedings were stood over at the request of the parties to enable settlement discussions to progress (to which I will return at [56], when dealing with mitigation).

3. [17]

   The continual adjournment of these proceedings came to an end on 1 August 2019, when Hammerschlag J made directions for the filing of pleadings and evidence. On 30 August 2019, the owner filed a Summons and Technology and Construction List Statement, seeking damages for building defects. (The defects later detailed included, relevantly, inadequate falls to the bathroom and ensuite floors and rectification works performed to a lift shaft.)

4. [18]

   In their Technology and Construction List Response, the defendants denied that the existence of defects. Further, the defendants contended that the owner’s consent had been sought to undertake works to rectify any defects. The builder had sought the owner’s consent to undertake the works set out in Annexure A on a without admissions basis. (Annexure A collated 95 items referred to in the expert reports obtained by the parties to that point, together with the proposed method of rectification.) The owner was said to have failed to mitigate its loss by allowing the builder to undertake these works and not permitting access to the defendants to undertake works. No Reply was filed.

5. [19]

   In 2020, the parties gradually served their evidence. Amongst the owner’s material was an affidavit of mechanical services engineer, Gary Yedalian, made on 5 March 2020 and an accompanying 225 pages of exhibits, including invoices rendered for his work from 18 October 2018 to 13 November 2019 totalling $165,137.37. Mr Yedalian detailed his initial engagement by the owners in October 2018 to review mechanical services at the building in connection with the issue of the Annual Fire Safety Statement (AFSS). On inspecting the building, he observed a number of issues that required corrective action and prepared two reports in November 2018, recommending repairs. In January 2019, he met with an expert retained by the owner, Paul Jones, “to discuss the mechanical and fire safety issues at the building”. In April 2019, Mr Yedalian prepared a quotation to undertake the minimum amount of works required to achieve the AFSS for the building and entered into a contract with the owner to undertake that work. He completed this work in July 2019. Mr Yedalian also undertook further inspections of the building in relation to the installation of access panels in each apartment, investigating sub-ducts for the kitchen exhausts and investigated deficiencies with the carpark exhaust and smoke spill system. He issued quotations to undertake further work and did so. Mr Yedalian detailed further work undertaken for the owner from September to November 2019 and provided inspection reports and notes. He also attended the building in February 2020 with Mr Jones to assist him with his investigations in relation to air conditioning and took photographs of air conditioning units for this purpose.

6. [20]

   In March 2021, orders were made for mediation. In July 2021, Hammerschlag J noted that he considered this to be a matter which should be referred to a referee in its entirety “and that the referee should determine whether the plaintiff should serve a Scott Schedule in accordance with UCPR rule 15.2.” In October 2021, Stevenson J made an order under r 20.17 of the UCPR, referring the whole of the proceedings to engineer and barrister, Steven Goldstein, for inquiry and report. The Court made the Usual Order for Reference contained in Annexure 2 to Practice Note SC Eq 3, as earlier described.

7. [21]

   On 6 April 2022, the defendants served an affidavit by director, Edward Doueihi, who described the defendants’ efforts to resolve the owner’s complaints through: settlement discussions; joint inspection of experts; an ‘in principle’ agreement that the builder would remedy agreed defects; and the subsequent unfolding of that agreement, resulting in the prosecution of these proceedings.

8. [22]

   On 19 April 2022, the hearing began before the referee and occupied five days on the issue of liability.

9. [23]

   In June 2022, the owner served a further affidavit by Mr Yedalian, who provided further details in respect of the work undertaken in each of his invoices, including invoices issued since his first affidavit. His invoices now totalled some $360,000.

10. [24]

    In July 2022, Ball J amended the orders for referral so that a report would be provided as to liability by 16 December 2022 and a report as to quantum by 31 March 2023.

11. [25]

    In September 2022, the owner served a third affidavit from Mr Yedalian, providing further detail on the costs charged to the owner to rectify defects identified by Mr Jones and linking the amounts charged in Mr Yedalian’s invoices to those particular defects. Two days’ later, the hearing on liability resumed before the referee for two more days. Mr Doueihi gave evidence and was cross-examined.

12. [26]

    On 19 September 2022, during an expert conclave concerning the bathroom falls, the defendants objected to an annexure to the joint report on the basis that the owner’s expert sought to introduce new items that were not included in the Scott Schedule. The referee admitted the material but added:

13. [27]

    From October 2022 to January 2023, the parties served various ‘rounds’ of submissions. On 19 January 2023, the hearing on liability continued for an eighth day, followed by further ‘rounds’ of written submissions from the parties. On 2 February 2023, the hearing before the referee continued for a ninth day, followed by a further ‘rounds’ of submissions from the parties. The time for the referee to provide his report on liability was extended by the Court and was ultimately provided on 24 March 2023 in respect of liability (and comprising some 200 pages).

14. [28]

    In his liability report, relevantly, the referee considered the owner’s claim in respect of an insufficient fall on the tiles in 32 bathrooms. The referee noted that the relevant standard at the time when the building was under construction was AS3740-2004, which required that all surface water drain to floor waste without ponding on the floor. The referee did not accept the defendants’ submission that a method for determining whether there was ‘ponding’, set out in more recent standard AS3740-2021, was relevant to determining whether a defect existed in respect of inadequate falls. The referee noted that the method would be difficult to achieve in practice and was not mandatory. Nor was the more recent standard consistent with the earlier standard in some respects.

15. [29]

    The referee noted that the building experts agreed that there were inadequate falls in all of the bathrooms; the defendants’ expert agreed that, with a few exceptions, the falls measured in the wet areas either had 0mm of fall or a negative fall, that is, away from the floor waste: liability report at [272]. The experts disagreed, however, on the method of rectification, where the owner’s expert considered that the areas needed to be re-tiled and the defendants’ expert considered that it was sufficient to grind the stone tiles to achieve the necessary fall. After considering the evidence on this subject, the referee concluded that the owner’s proposed method of rectification should be preferred, as the grinding of tiles was not a reasonable or adequate solution: liability report at [283].

16. [30]

    In June 2023, Ball J made orders for the parties to prepare evidence on quantum for the referee and extended time for the referee’s report on quantum. The owner was also ordered to provide the defendants’ experts with access to the building.

17. [31]

    On 8 September 2023, the matter was relisted at the request of the defendants, where there was a dispute as to access. The transcript records that the defendants sought access to the bathrooms to see whether the fall in the bathrooms complied with the current Australian Standard. The owner submitted that this issue had already been determined adversely to the defendants in the referee’s liability report. The transcript records:

18. [32]

    In December 2023, the owner served an unsworn affidavit by the strata manager, Patrick Van Oort, accompanied by an exhibit with various contracts entered into by the owner with contractors and invoices. Where it was apparently then being suggested by the defendants that some of the defects had already been rectified by the owner, Mr Van Oort described the work that had, and had not, been done at that point. Mr Van Oort annexed a contract entered into by the owner to rectify the bathroom and ensuite in one of the apartments, which contract had been performed.

19. [33]

    On 11 December 2023, the hearing on quantum began and was held over four days. Mr Yedalian gave evidence and was cross-examined by the defendants’ senior counsel and recalled for further cross-examination (twice). On day two, the owner provided a sworn affidavit by Mr Van Oort. There was some ‘to and fro’ as to whether the owner should be permitted to read the affidavit given its late service. The owner’s senior counsel asked to reserve the reading of the affidavit until he had a chance to see whether some of the issues dealt with remained relevant. The defendants’ senior counsel suggested that the affidavit was being withdrawn as it demonstrated that the estimate of the owner’s quantity surveyor, Bob Macansh, for rectification of bathrooms was double “what they would be in the real world”. The owner withdrew the tender. The referee expressed concern as to the relevance of Mr Van Oort’s affidavit in any event, absent some assistance from the quantity surveyors.

20. [34]

    The transcript records that the referee continued to express concerns as to whether Mr Van Oort’s affidavit was of any assistance or relevant in any event. The defendants then sought to tender the contract attached to Mr Van Oort’s affidavit, together with an analysis of that contract by the defendants’ quantity surveyor, David Madden. According to the transcript, the owner’s senior counsel had not seen Mr Madden’s analysis of the document. The referee rejected the tender, noting “Frankly, you’ve got two qualified experts here who have given evidence. They have diverse views. For me, it’s just a matter of exploring the differences, and I don’t know that I’m going to be assisted in doing that by this document”.

21. [35]

    After the hearing, the quantity surveyors provided a joint expert report on rectification costs, followed by ‘rounds’ of submissions on quantum. The Court extended time for the referee’s report on quantum, which was ultimately provided on 11 June 2024 (totalling 240 pages). The parties have since filed the motions before the Court as to whether the referee’s reports should be adopted in whole or part.

MITIGATION

1. [36]

   The defendants’ main attack on the referee’s reports was in respect of a finding that the owner did not fail to mitigate its loss. An order was sought under r 20.24 of the UCPR that the 64 pages in the liability report which addressed this subject ought be rejected. In short, before the referee the defendants contended that the owner had failed to mitigate its loss by unreasonably refusing access to carry out rectification works. The parties had been negotiating a draft deed, which was said to have given rise to an agreement on 9 October 2018 that the defendants would attend to the work in Annexure A, to be attached to the deed. A year later, on 8 November 2019, the owner declined to allow the defendants to attend the property to rectify the defects. The referee found that owner’s refusal to permit access to rectify the defects was reasonable as it had lost confidence in the defendants’ ability to perform such works. The defendants submitted that, given rulings made by the referee on the admissibility of hearsay evidence, this finding was not open on the evidence before him. Had the owner acted in a “reasonably prudent” way and allowed the builder to rectify the defects, no loss would have arisen: Sherson & Associates Pty Ltd v Bailey [2000] NSWCA 275 (per Heydon JA); Owners SP 76674 v Di Blasio Constructions PL [2014] NSWSC 1067 at [28], [44] (per Ball J); Owners Strata Plan 78465 v M D Constructions Pty Ltd [2016] NSWSC 162.

2. [37]

   Before considering the defendants’ multiple contentions on this subject, it is timely to review the common law principles of mitigation and Di Blasio, the defendants placing much weight on the latter. Of course, in many cases the parties will have made contractual provisions for the rectification of defects, which will prevail over the common law.

Principles

1. [38]

   While it is frequently said that the plaintiff is subject to a ‘duty’ to mitigate, this is apt to mislead; there is no positive duty to mitigate but a ‘duty’ not to act unreasonably: Professor JW Carter, Contract Law in Australia (8th ed, 2023, JW Carter Publishing) at [35-35]. In short, in assessing loss for breach of contract, “loss which is due to unreasonable or improvident actions of the plaintiff is generally disregarded by application of the rules of mitigation of loss”: Cessnock City Council v 123 259 932 Pty Ltd [2024] HCA 17 at [120] (per Edelman, Steward, Gleeson and Beech-Jones JJ).

2. [39]

   In the context of commercial contracts, for some time it was popular to cite Scrutton LJ’s statement in Payzu v Saunders [1919] 2 KB 518, “In commercial contracts it is generally reasonable to accept an offer from the party in default”: at 589. Then Donaldson MR’s observation in Sotiros Shipping Inc v Sameiet Solholt (The Solholt) [1983] 1 Lloyd’s Rep 605 gained prominence, “A plaintiff is under no duty to mitigate his loss, despite the habitual use by lawyers of the phrase ‘duty to mitigate’. He is completely free to act as he judges to be in his best interests”: at 680. The requirement of reasonableness must now be added to the latter formulation. As Heydon JA explained in Sherson & Associates Pty Ltd v Bailey [2000] NSWCA 275 at [77]:

3. [40]

   Whether there is an obligation to mitigate is a question of law: St Vincent's Hospital (Melbourne) Inc v University of Adelaide [2002] VSC 297 at [36] (Warren J, as the Chief Justice then was). But what is reasonable for a person to do in mitigation of damages is a question of fact in the circumstances of each case: Payzu v Saunders at 589 (per Bankes LJ); British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 at 688–9; Regional Development Australia Murraylands and Riverland Inc v Smith [2015] SASCFC 160 at [139]. Where it is contended that a plaintiff should have taken steps by way of mitigation, the onus of proof is on the defendant: Cessnock City Council v 123 259 932 at [121], citing TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130 at 138 (Kitto, Windeyer and Owen JJ).

4. [41]

   In Di Blasio, Ball J summarised these common law principles of mitigation and then observed at [44]: (some citations omitted)

5. [42]

   The relevant portion of the text cited by his Honour is Julian Bailey, Construction Law: Volume II (1st ed, 2011, Routledge) at 1131, [14.109]: (citations omitted)

6. [43]

   The case cited by his Honour was Cassidy v Engwirda Construction Co (No 2) [1968] Qd R 159, where Hoare J (overturned in part by the Court of Appeal (Cassidy v Engwirda Construction Company (No 2) [1968] Qd R 159) but restored by the High Court (Cassidy v Engwirda Construction Co (No 3) [1968] QWN 47) stated at 166:

7. [44]

   Returning to Di Blasio, Ball J continued at [45]-[46]:

8. [45]

   Di Blasio was followed in Owners Strata Plan 78465 v M D Constructions Pty Ltd [2016] NSWSC 162 at [27] (Hammerschlag J); Owners Strata Plan 89041 v Galyan Pty Ltd [2019] NSWSC 619 at [20] (Stevenson J) and Hacer Group Pty Ltd v Euro Façade Tech Export Sdn Bhd [2022] VSC 373 at [30] (Stynes J).

9. [46]

   The owner submitted that the statements of principle in Di Blasio are not correct and there was no general positive obligation on a party that has suffered loss to allow the wrongdoer to minimise the quantum of damages. I suppose that is one way of reading Di Blasio. But, as Leeming JA noted in Kassam v Hazzard; Henry v Hazzard (2021) 106 NSWLR 520, “Just because a passage in reasons for judgment seems apposite if read in isolation does not make it so. Reasons for judgment must always be read in context”: at [152], citing Commonwealth of Australia v Bank of New South Wales (1949) 79 CLR 497 at 637-638.

10. [47]

    Both sources referred to by Ball J in Di Blasio at [44], being the text and Cassidy v Endwirda Construction, speak of the economic advantages which may adhere to both parties by permitting the builder to remedy defects rather than a new builder. As I read it, Ball J explained in Di Blasio that as a consequence of the owner acting reasonably in mitigation of their loss by permitting the builder to return to site and rectify defects, the effect is that the builder’s damages are also thereby decreased. I do not take Ball J to have been asserting a separate duty owed by the plaintiff to the builder, nor expanding common law principles, but summarising the existing law and how it operates in the particular context of building contracts. As Irvine CJ explained in Driver v War Service Homes Commissioner (1923) 44 ALT 103 at 134 (quoted with approval in TCN Channel 9 v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 162 (Priestley JA)):

11. [48]

    Of interest, in Di Blasio and the cases which followed it, none of the plaintiffs were found to have failed to act reasonably in mitigation. (Hacer Group is not particularly relevant, where the plaintiff’s claim was undefended.) In Di Blasio, the builder contended that the owner acted unreasonably in not pursuing discussions concerning the scope of works to be undertaken by the builder and not accepting the builder’s offer to carry out rectification work for $1. After examining the history of negotiations between the owner and builder, Ball J did not agree. In short, the defects were significant and the builder’s initial repairs were inadequate. The owner acted reasonably in retaining an expert, who identified a number of defects and how they should be rectified. The builder never accepted the substance of the expert’s report, preferring a “wait and see” approach to the manifestation of defects and then proposing an inadequate solution. His Honour observed, “it seems that the parties remained far apart. … The Owners Corporation could reasonably have concluded that an agreement was never going to be reached with the Builder … and that further discussion with the Builder was pointless”: Di Blasio at [53]. The only option for the Owners Corporation was to commence proceedings and, by the time the builder’s offer to remedy the defects for $1 was made, it was not unreasonable for the Owners Corporation not to accept the offer as “the Owners Corporation could reasonably have taken the view that it no longer had confidence in the Builder and that it wanted someone else to undertake the rectification work”: Di Blasio at [54].

12. [49]

    In M D Constructions, Hammerschlag J concluded that the builder “has fallen well short” of establishing that the plaintiff acted unreasonably, where the builder’s original work was systemically defective, the builder’s initial efforts to rectify defects were ineffective and deficient, and the builder’s conduct in dealing with the owners was “tantamount to a refusal to repair or take responsibility for repairing the existing defects”: at [33], [37]. The builder was difficult to deal with and proposed repairs which were as defective as the original building work. His Honour concluded that “there was no realistic prospect of [the builder] agreeing to carry out an agreed scope of works that recognised the extent of the defects in the work”: at [47].

13. [50]

    In Galyan, Stevenson J concluded that the builder had not shown that the owners corporation acted unreasonably in not allowing the builder to return to site where the builder did not propose a workable scope of works and adopted an unnecessarily aggressive approach (with the builder describing some of the owners corporation’s claims as “bogus” and “frivolous”): at [87]-[88]. The rectification work ultimately proposed by the builder fell far short of what was needed, such that it was reasonable for the owners corporation not to permit the builder to rectify the works on the basis proposed: at [89].

14. [51]

    What each of these judgments indicate is that whether the owner acted reasonably or unreasonably generally depends on a review of events as they have unfolded since building work was initially undertaken, traversing when defects were identified, subsequent negotiations, conduct during litigation and the extent to which the owner’s complaints were ultimately vindicated by the court or tribunal. The following facts may tell upon whether an owner has acted unreasonably when dealing with the builder such that the owner’s loss may be disregarded:

15. [52]

    Since Di Blasio, s 18BA was added to the Home Building Act, albeit the section does not apply to contracts entered into before 1 March 2015: sch 4, s 125(1) Home Building Act; Home Building Amendment Act 2014 (No 24) (NSW) Sch 1 at [27]. Section 18BA provides: (emphasis added)

16. [53]

    Where the owner may not have a contract with the builder, s 18BA codifies the owner’s obligations to act reasonably in mitigation by notifying the builder of defects and allowing reasonable access to rectify such defects. Common law principles can be expected to continue to inform the application of the section and fill any ‘gaps’: Minister for Lands and Forests v McPherson (1991) 22 NSWLR 687 at 698-9 (Kirby P).

Referee’s consideration

1. [54]

   This brings me to the referee’s report. In the relevant portion of the liability report, the referee set out the pleadings in respect of failure to mitigate and the legal principles, quoting extensively from Di Blasio and M D Constructions. The referee noted that a “key issue” was whether the defendants had been given a reasonable opportunity to rectify defects: liability report at [69]. The referee set out the parties’ submissions. Before setting out the events in detail from 2015 until November 2019, the referee considered it necessary to determine a “hotly contested” issue in respect of onus: liability report at [74]. The referee then set out the parties’ submissions on onus, most of which were repeated on this application. The referee accepting that, while the defendant carried the ultimate legal onus, the evidentiary onus of proving a failure to mitigate may shift to the plaintiff during trial: CJD Equipment Pty Limited v A&C Constructions Pty Limited [2011] NSWCA 188 at [88]. The referee did not accept, however, that it was enough for the defendants to prove that the owner had denied them access to remedy the defects; the defendants had to prove that the decision to deny access was unreasonable: liability report at [91].

2. [55]

   The referee then moved to an issue which now finds voice in prayer 5 of the defendants’ motion, being the import of assertions in solicitor’s correspondence. The mediator set out the parties’ submissions (repeated on this application) before considering the relevant authorities, being Subramaniam v Public Prosecutor [1956] WLR 965, R v Preston (Court of Criminal Appeal (NSW), 9 April 1997, unrep) (per Handley JA, Smart and Dunford JJ)), Ritz Hotel Ltd v Charles of the Ritz Ltd (1988) 15 NSWLR 158 and Re HIH Insurance Ltd (in liq) [2015] NSWSC 790. The referee accepted that a solicitor’s letter could not be relied upon as to the fact of the assertions made in the letter but could be admissible as to the state of mind of the sender. The statement made by the owner’s solicitor was contemporaneous to, and a direct reflection of, the minutes of the owner’s committee meeting held a week earlier: liability report at [103]. The solicitor’s letter was stated in similar terms to the minutes of meeting: liability report at [104]. On this basis, the referee accepted that the letter from the solicitor was a statement of the state of mind of the owner at that time and admissible as evidence on that basis: liability report at [105]. The referee had regard to other evidence which was in a similar vein: liability report at [106].

3. [56]

   The referee then turned to consider the factual material in respect of the obligation to mitigate, traversing almost 40 pages of the report. He began from when the owners first obtained a building defects report in May 2015. In short, in 2017, the parties corresponded in relation to defects and participated in a settlement conference before the parties’ respective experts jointly attended a site inspection. In 2018, without prejudice correspondence ensued to attempt to resolve the proceedings by the builder rectifying agreed defects. The correspondence went back and forwards over six months until October 2018, when the parties informed the associate to Ball J that the parties had reached an ‘in principle’ settlement and were in the process of finalising a deed of settlement.

4. [57]

   The referee noted that, in November 2018, a draft deed of settlement and release was circulated but, on 26 November 2018, an owner’s strata committee meeting was held, the minutes of which record:

5. [58]

   The “P Macahdo” referred to in the minutes of 26 November 2018 was Patrick Machado, who ran the owner’s defects sub-committee, gave evidence and was cross-examined. I note that it was put to Mr Machado by the defendants’ senior counsel – as a positive proposition – that, by 5 October 2018, an impasse had been reached in settlement discussions. Mr Machado readily agreed, pointing to a number of bases on which an impasse had been reached, “we never succeeded in reaching the settlement.” In particular, there was a disagreement on the rectification measures which would be undertaken, including for wet area defects.

6. [59]

   In December 2018, the owner’s solicitor wrote to the defendants’ solicitor, complaining that urgent works required to remedy significant water ingress and defective fire safety measures had not begun, despite requests traversing some months: liability report at [173]. Further correspondence ensued. By February 2019, some work had begun to replace fire doors.

7. [60]

   By April 2019, the owner’s solicitors complained that essential fire safety defects had yet to be completed and there was no explanation for the delay, in light of which “I am instructed that the Owners have no confidence that your clients are willing or able to carry out the works in accordance with the timeframe or submission of the SFSS [Supplementary Fire Safety Statement] or at all.” The owner’s solicitor advised that, in order to ensure the safety of the building and its occupants in the event of fire and to comply with their obligations to submit the SFSS for the building, the owners would now proceed to engage Mr Yedalian and a joiner to carry out the necessary rectification works, the costs of which would be sought in these proceedings. The defendants’ solicitors disagreed.

8. [61]

   I note that Mr Machado said during cross-examination that, by then, he had asked the owner’s solicitors to appoint a more senior solicitor given the owner’s dissatisfaction with not having the fire safety works completed; Mr Machado approached the law firm and requested a change of solicitor. Mr Machado also said in cross-examination:

9. [62]

   Mr Machado said that the builder was saying the right things but “They weren’t doing it. … It’s the actions that matter.”

10. [63]

    On 30 August 2019, I note that the owner filed the Summons and Technology and Construction List Statement. The referee noted that, by October 2019, the owner’s solicitors advised that their client had lost confidence in the builder and was unwilling to allow the builder any further opportunity to repair the defects. In a very detailed analysis of events, the referee concluded that the defendants had been given a reasonable opportunity to undertake defect rectification but had failed to keep the owners properly informed of their progress. The owners did not act unreasonably in losing confidence in the defendants, nor in refusing to allow the defendants access to carry out further work.

Defendants’ contentions

1. [64]

   The defendants contend:

2. [65]

   As earlier noted, whether there is a need to mitigate at the outset is a question of law. There was no dispute before the referee that the owner was obliged to mitigate. Whether the owner acted reasonably is a question of fact in all the circumstances of the case, not a question of law: see [40].

3. [66]

   Prayers 1 and 2 do not correctly state the legal principles nor cite authority for the proposition in prayer 1(c). As I have endeavoured to set out, the referee undertook a very detailed analysis of events from when defects were first detected, including a protracted period of negotiations to a point at which the owner eventually lost patience. Where the referee was dealing with a question of fact, not law, and approached the task with great thoroughness, this points towards acceptance of the report on this subject. As McDougall J noted in Chocolate Factory, “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”: at [7(7)]. To do otherwise would frustrate the purpose of the rules for referral, even if the Court might have reached a different conclusion in some respect from that of the referee: Chocolate Factory at [7(9),(10)].

4. [67]

   By the time of the owner’s solicitor’s letter in October 2019, advising that the owner had lost confidence in the builder, a year had passed since an ‘in principle’ agreement had been reached. The parties were yet to exchange a formal deed for the builder to remedy agreed defects. This fact speaks volumes. That the parties were unable to finalise their agreement over a protracted period suggests that the owner’s perception that no agreement would be reached in a timely manner or at all was reasonable. The fact that the defendants continued to submit on this application that the owner’s proposed method of rectifying the ‘big ticket’ item of bathroom falls is unreasonable rather confirms that the owner’s assessment of the situation was correct. Nor does the fact that the owner had an eye to where its best interests lay disqualify the owner from recovering their loss, so long as the owner’s approach to assessing that question was reasonable. What is reasonable is a question of fact in the circumstances of each case, and the referee has done a careful job in analysing those circumstances.

5. [68]

   The defendants’ next contentions concerned the onus of proof. The defendants contend in prayers 3 and 4 that the referee further erred as a matter of law in:

6. [69]

   In making such findings, the referee was said to have erred by “eliding the nature of a static legal onus with a concept of a shifting evidentiary onus and in so doing, the Referee created a further element required to be satisfied in order to establish a failure to mitigate; in circumstances where that further element not being known to the law”: prayer 4.

7. [70]

   The defendants submitted that the referee failed to find that, once the owner refused access on 8 November 2019, the evidentiary onus shifted to the owner to establish that it was reasonable for it to have acted in that way. The referee failed to consider that any ‘loss of confidence’ was a matter peculiarly within the knowledge of the owner’s corporate mind. Where the owner did not call the other members of the Executive Committee, the defendants needed only “slight evidence” to establish failure to mitigate: Hampton Court Ltd v Crooks (1957) 97 CLR 367 at 375; Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333 at [121].

8. [71]

   The defendants submitted that the referee directed his analysis to whether the builder had satisfied its onus by restricting his consideration to whether it was enough for the builder to establish that the injury suffered by the owner would have been less had the owner provided access to the builder so it could rectify the defects. The referee thereby focussed on the legal onus but not the evidentiary onus, ignoring the latter. An owner is required to give a builder an opportunity to minimise the damages it must pay by giving it the opportunity of rectifying the defects as it may be less expensive for a builder rather than a third party to rectify the defects: Di Blasio at [44], M D Constructions at [28]. Whether the owner’s losses would have been less had the rectification been carried out was a secondary question. Once a contractor has established that a principal has refused it access to rectify defects, with no reasonable basis to do so, then the contractor has discharged its prima facie legal onus of proving a failure to mitigate. It is then incumbent on the principal to prove that it was reasonable in all the circumstances for it not to have done so. Whilst the “legal onus” to prove a failure to mitigate remained with a defendant, the evidentiary burden shifted to a plaintiff to demonstrate why its refusal to grant access was reasonable. The referee was said to have misunderstood and mis-applied CJD Equipment Pty Ltd v A&C Constructions Pty Ltd [2011] NSWCA 188 at [87].

9. [72]

   The defendants submitted that the referee wrongly found that the owner’s loss of confidence was ‘reasonable’ in all the circumstances. The referee did not consider that the owner was required to displace its evidentiary onus by establishing, on the evidence, that it acted reasonably in refusing the builder access to rectify the defects. Rather, the referee reversed the onus and approached his assessment by considering whether the builder had established those factual matters. The referee did not construe all of the evidence in an objective and rational way. A granular review of the referee’s report followed.

10. [73]

    It is not easy to fully absorb the defendants’ submissions without having conducted the reference oneself. But the simple answer is that the referee was not bound by the rules of evidence: r 20.20(2)(b) UCPR. I accept, at a level of generality, the concepts of legal, evidentiary and shifting onus. Perhaps noteworthy, these concepts are not considered in any detail, or at all, in the authorities to which I have already referred on the principles in respect of mitigation: see [38]-[48]. No authority was cited for the proposition that, once the owner refused the builder access to rectify defects, the evidentiary onus shifted to the owner to establish that it was reasonable, in all of the circumstances, for it to have so acted. It would be a simple matter to establish – and indeed, would probably be uncontested – that at some point the owner refused the builder access to remedy defects. Whilst each case must turn on its particular circumstances, I agree with the referee that the fact that the owner refused access does not, of itself, shift the onus of proof from the builder to the owner to prove the reasonableness of that decision. Acceptance of such a proposition would effectively shift the onus of proof in respect of this defence from the defendant to the plaintiff for practical purposes.

11. [74]

    By prayer 5, the defendants contended: (emphasis in original)

12. [75]

    In short, the defendants submitted that the referee relied on assertions contained in the correspondence from the owner’s solicitors as the truth of the matters asserted, which was directly contrary to his earlier ruling “that an assertion in correspondence between solicitors was not proof of the existence of the fact so asserted”. Had the referee abided by his earlier ruling, there would have been no lay evidence or documentary evidence on which to make a finding that the owner had ‘lost confidence’ in the builder. In so doing, the referee accepted that the solicitor’s correspondence was admissible as proof of the ‘state of mind’ of the sender: Subramaniam v Public Prosecutor [1956] WLR 965. The ‘state of mind’ of the solicitor was not relevant. Section 69(3) of the Evidence Act 1995 (NSW) precludes such evidence. The representations made in the solicitor’s correspondence were hearsay assertions: Pollitt v R (1992) 174 CLR 558 at 620. By receiving such evidence, including in face of his ruling to the contrary, the referee denied procedural fairness and drew an inference contrary to Jones v Sutherland Shire Council [1979] 2 NSWLR 206 at 230 (Mahoney JA). The defendants could not test the assertions in the solicitor’s correspondence.

13. [76]

    The defendants submitted that the referee erred in accepting the solicitor’s letter as evidence of the owner’s state of mind: at [101]-[103]. There were a multitude of equally plausible explanations for the statements made in the solicitor’s letter. The decision to refuse access could reasonably have been part of the owner’s forensic strategy where it considered it was in its own economic “best interests” to do so, as recorded in the minutes of a meeting of the Executive Committee on 26 November 2018.

14. [77]

    The short answer, again, is that the referee was not bound by the rules of evidence. Nor does the referee appear to have taken the assertions in solicitor’s correspondence – which I note the defendants’ senior counsel put to Mr Machado in cross-examination as reflecting his views at the time – as evidence of the facts there stated. Rather, the referee had regard to the correspondence in combination with other contemporaneous documents which together painted a cohesive picture of the owner having lost confidence in the builder to attend to the rectification of defects in a timely manner or at all or in a manner which the owner regarded as acceptable: see [55].

15. [78]

    Further, the import of the evidence given by Mr Machado in cross-examination is that the instructions for the solicitor’s letters most likely came from the defects committee, where he did not generally trouble the executive committee with such correspondence nor consult the strata manager. Mr Machado did not specifically recall whether he gave instructions to send the solicitor the letter of 4 April 2019, but “this letter was sent as a recitation of the facts that had occurred up to that point.”

16. [79]

    It is clear from the referee’s report that he took Mr Machado’s evidence into account in his determination, as well as the evidence of Mr Doueihi and extensive contemporaneous communications. The referee’s consideration of the evidence was most detailed and his conclusions available on the material, where I have relied on the referee’s description of that material and ‘spot checked’ the accuracy of his summary from time to time.

17. [80]

    Further, the defendants contended in prayer 6 of their motion:

18. [81]

    The defendants submitted that, given the ruling made in respect of the solicitor’s correspondence, it was not reasonable for the referee to draw the positive inference; it was not enough that the “links” considered as a whole lent support to the conclusion reached, where the strength of the individual pieces of evidence said to make up the ‘links’ has to be scrutinised: Jagatramka v Wollongong Coal Ltd [2021] NSWCA 61 at [48]; Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1 at 5.

19. [82]

    The defendants’ complaint is a little non-specific, where the referee appears to have reviewed and summarised each and every piece of correspondence between the parties over 40 pages and made a finding of fact. I understand the defendants to be simply saying that the referee made the wrong finding. Even if that be so, that would not be a basis on which the Court would necessarily reject the referee’s report, given the principles as summarised in Chocolate Factory.

20. [83]

    Finally, in prayer 7, the defendants contended:

21. [84]

    In short, the defendants submitted that the referee relied on the lay evidence of a member of the Strata Committee, Mr Machado, to corroborate the owner’s solicitors correspondence where that correspondence infringed the referee’s earlier ruling and was contrary to a further ruling made by the referee that Mr Machado’s evidence was only evidence of his own opinion and belief, not as proof of the “state of mind” of anyone other than himself. Mr Machado agreed that he was not the person making the decision. Nor were there any minutes which supported that owner’s loss of confidence in the builder.

22. [85]

    The defendants submitted that they issued a Notice to Produce to the owner seeking documents evidencing the asserted ‘loss of confidence’ and, “predictably”, nothing was produced. I note that the Notice to Produce called for documents recording the provision of instructions by the owner to its solicitors; whether that had anything to do with non-production is not known. What was produced were the minutes of 14 meetings of the strata committee meeting from 30 July 2018 to 13 November 2019, at which this subject was discussed.

23. [86]

    The defendants submitted that the referee drew positive inferences in support of the owner’s asserted ‘loss of confidence’, even though the owner failed to adduce any probative or admissible evidence, including failing to call members of the Executive Committee other than Mr Machado. The referee should have inferred that such evidence would not have assisted the owner: Burke v LFOT Pty Ltd (2002) 209 CLR 282 at [134], per Callinan J. An inference should not be drawn in favour of a party when direct evidence would have been available from that party but that party failed to call that evidence: Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418.

24. [87]

    Again, the referee was not bound by the rules of evidence. The referee was entitled to take Mr Machado’s evidence into account and to “inform himself … in relation to any matter in such manner as the referee thinks fit”: r 20.20(2)(b). The referee could well have considered that he was not satisfied that the owner had lost confidence in the builder on the basis of Mr Machado’s evidence alone. In the absence of each of the members of the executive committee being called to set out what their view was at the time, the referee could have inferred that their evidence would not have assisted the owner and gone further to conclude that the owner had not in fact lost confidence in the builder. But the referee was not obliged to take this course and could equally have taken the view that Mr Machado was tasked with dealing with the rectification of defects by the owner, and the executive committee would have likely accepted that, as Mr Machado had no confidence in the builder, nor should they. I see no need to re-visit the referee’s conclusion, where Mr Machado’s evidence was only part of the evidentiary matters taken into consideration and detailed at length in 40 pages of the liability report.

25. [88]

    The defendants sought a declaration that the owner failed to mitigate its loss, reasonably or otherwise, such that avoidable loss could not be recovered by the owner; rather than that the recovery was reduced after allowance for what should have been done by the owner but was not: prayer 17. In the alternative, the builder sought a declaration that any damages be assessed only on the basis that the owner took hypothetical action to rectify the defects and should be endowed with the commensurate hypothetical benefit, being the cost of the reasonable hypothetical steps, that is, accrued loss rather than future loss: prayer 18. For the reasons given, the defendants are not entitled to the declaratory relief sought.

BATHROOMS

1. [89]

   By prayer 8 of the defendants’ motion, it is contended that the referee erred “as a matter of law” in the liability report in:

2. [90]

   The defendants sought an order under r 20.24 of the UCPR that the portion of the quantum report in respect of Item F1.1, being Items 1 to 35 in the Scott Schedule, ‘Wet area defects’ at pp 79-98, be rejected. An order was sought that any rectification be contingent on each bathroom and ensuite failing the ‘ponding’ requirement of Appendix Point 5 of AS3740-2021: prayer 19.

3. [91]

   In prayer 9, the builder asserted that the referee erred because he failed to admit into evidence, on the basis of relevance, the following documents:

Referee’s consideration

1. [92]

   I have earlier set out how the referee dealt with the defendants’ tender of what became MFI-4 and MFI-5: see [33]-[34].

2. [93]

   In his liability report, the referee began his consideration of the owner’s claim in respect of the 32 bathrooms by setting out the defendants’ submissions (largely repeated on this application) and the owner’s response before turning to consider the standards in some detail. The referee accepted that the fall requirements in AS3740-2004 were not mandatory but spoke of recommended fall ratios: liability report at [260]. The standard did not describe a method to determine whether there was ‘ponding’. The referee concluded at [262]-[263] of the liability report:

3. [94]

   The referee also observed other differences between the two standards, which had the effect that applying the test for ‘ponding’ in the later standard would not result in compliance with all of the requirements of the earlier standard: liability report at [264(a)-(b)]. Further, the method for determining ‘ponding’ in the later standard would be difficult to achieve in practice and was not mandatory but provided for information and guidance: liability report at [264(d)-(e)]. Further, at [265]:

Defendants’ contentions

1. [95]

   The defendants contended that the referee erred in assessing the defective nature (and scope of rectification) of the bathrooms and ensuites by reference to a superseded version of the applicable Australian Standard (AS3740-2004): The Owners of SP 97315 v Icon Co (NSW) [2023] NSWCA 303 at [11]. The referee failed to consider whether the bathrooms were compliant with the current standard AS 3740-2021. There was no dispute that the only mandatory requirement in AS 3740-2004 is that floor finishes in bathroom wet areas must be of such a steepness as is necessary to ensure that water is able to drain without ponding, such that it does not adversely affect the health or amenity of the occupants and/or the building elements. There is no definition of ‘ponding’ in AS 3740-2004, although there is a definition of ‘ponding’ in AS 3740-2021.

2. [96]

   The defendants submitted that none of the experts had carried out testing to determine whether ponding subsisted to such a degree as to infringe the definition in Appendix B.5 of AS3740-2021. The referee erred in ignoring the current standard and did not accept that the bathrooms could, without any rectification work, already be compliant with that standard where it was unknown whether there is in fact any ‘ponding’ in the bathrooms after 5 hours at the specified atmospheric conditions in AS 3740-2021. The defendants’ request for the bathrooms to be inspected and further test be undertaken was rejected. The referee ought to have found that further tests should have been conducted in order to ascertain whether the un-rectified bathrooms complied with the new AS 3740-2021, such that the plaintiff would suffer no loss to the extent that they did. Contractual loss does not include loss that is not reasonable for the wronged party to recover: North East Equity Pty Ltd v Proud Nominees Pty Ltd (No 2) [2008] FCA 1189 at [382]-[384] (Rares J); Renown Corporation Pty Ltd v SEMF Pty Ltd (2022) 110 NSWLR 246 at [20] (Brereton JA); Corbett Court Pty Ltd v Quasar Constructions (NSW) Pty Ltd [2008] NSWSC 1423 at [76] (Hammerschlag J).

3. [97]

   The defendants submitted that the bathroom contract was relevant as objective and independent evidence of the market cost to rectify a bathroom in the property the subject of these proceedings.

4. [98]

   The owner submitted that the referee concluded that the method for determining whether ponding exists as stated in AS3740-2021 was irrelevant, not the “existence” of ponding per se. The referee correctly found that the proposed method in Appendix B5 of AS3740-2021 “imposes a number of conditions that would be difficult, if not impossible, in practice to achieve”. The parts of the current version of the standard that the defendants sought to invoke were not mandatory or determinative, but merely for information, as the referee observed. The referee addressed the defects as found and agreed between the experts and proposed methods of rectification. There was no relevant error. Not only did the owner and the referee decline the builder a further opportunity to inspect the bathrooms, so did Ball J on 8 September 2023, with costs.

5. [99]

   The owners further submitted that there was no error of law, where the measure of damages is the amount of money which will place the owner in the position they would have been had the contract been performed: Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8; Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36. The general rule is that damages for breach of contract are assessed as at the date of the breach: Johnson v Perez (1988) 166 CLR 351 at 367. There was no basis for assessing damages as at 2021 or later. In this case, 'the contract' incorporated the version of AS3740 in force at the time, being AS3740-2004. Whether or not the work conformed to some other or later version of AS3740 was immaterial. That the experts agreed the bathrooms might already be compliant with the current standard was speculation and did not impact the owner's right to damages. The referee made findings as to the reasonable and necessary scope of works having regard to the agreement as to inadequate falls. The defendants bore the onus and had every opportunity to adduce evidence to establish that what had been constructed or what it proposed by way of remedial works provided functional equivalence but failed to do so: Building Insurers' Guarantee Corporation v The Owners Strata Plan 57504 [2010] NSWCA 23 at [79]-[81].

Consideration

1. [100]

   The referee’s analysis of the two standards, with respect, appears to be without error. I do not agree with the defendants’ contentions for, essentially, the reasons advanced by the owner. The general measure of damages is the amount, so far as money can provide, necessary to put the plaintiff in the position they would have been if the contract had been performed: Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350; Wenham v Ella (1972) 127 CLR 454 at 460 (per Barwick CJ); Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653; [1986] HCA 81. True it is that, in building cases, the remedial building work which an owner is entitled to undertake at the expense of the builder must be “necessary” and “reasonable”, which is a question of fact in each case: Bellgrove v Eldridge (1954) 90 CLR 613 at 619.

2. [101]

   The suggestion that remedial building work is “unreasonable” will only be satisfied in “fairly exceptional circumstances”: Tabcorp Hold v Bowen Investments (2009) 236 CLR 272 at [17]. Examples are where the owner is “merely using a technical breach to secure an uncovenanted profit” or where the costs of the proposed rectification is out of all proportion to the benefit to be obtained: Owners SP 92450 v JKN Para 1 Pty Ltd [2023] NSWCA 114 at [70]; followed in Icon at [12] (per Bell CJ). A defendant in such a case may actually have the legal onus of proving functional equivalence, so that reinstatement would be unreasonable: Building Insurers' Guarantee Corporation v The Owners Strata Plan 57504 [2010] NSWCA 23 at [80].

3. [102]

   The referee had before him two building experts, who agreed that there were inadequate falls in all of the bathrooms. The only point of controversy was the method of rectification. The possibility that the bathrooms, or some of them, might not have ‘ponding’ according to the method described in the 2021 standard was just that: a possibility. Some six years had passed between the commencement of these proceedings in NCAT and the expert conclave on this issue in September 2022. The defendants had ample time to explore this matter, but had not done so by the time the referee heard the evidence on this issue. Where the experts, including the defendants’ expert, agreed that there was a defect, it is difficult to see why the referee erred in proceeding as he did. Put another way, the defendants fell far short of establishing the “fairly exceptional circumstances” that, notwithstanding the agreed defect, the costs of rectification were “unreasonable”: Tabcorp v Bowen Investments at [17].

4. [103]

   As to the complaint about the MFIs, the approach taken by the referee to the tender of the contract and Mr Madden’s analysis was, with respect, unremarkable. The referee could inform himself in relation to any matter in such manner as he thought fit. The referee was entitled to conclude that this material was of no assistance, or relevance, to him. Whether or not that might be considered an error is irrelevant as it was plainly within the referee’s remit.

SCOTT SCHEDULES

1. [104]

   By prayer 11 of the defendants’ motion, it is contended:

2. [105]

   The defendants sought an order under r 20.24 that the relevant portions of the referee’s quantum report be rejected accordingly, being the last 20 pages: prayer 15. The defendants submitted that the referee ought not have allowed the claim for the so-called “Yedalian works” in circumstances where Mr Yedalian was said to be incapable of differentiating which works he had performed were for the purposes of litigation and which were genuine rectification of defects. The defendants submitted that many of the invoices were properly understood as claims for ‘costs’ incurred rather than ‘damages’. While an owner may be entitled to recover the reasonable costs associated with engaging a third party to investigate and report on the extent of a defect caused by another’s breach of obligation, an expert engaged for the primary purpose of their report being used in litigation may be recoverable as legal costs but not damages: Linklaters Business Services v Sir Robert McAlpine Ltd [2010] EWHC 2931 (TCC) at [167]-[168] (Akenhead J); McGlinn v Waltham Contractors Ltd [2007] EWHC 149 at [910]-[915] (Coulson J).

3. [106]

   The defendants submitted that, while Mr Yedalian was initially engaged by the owner in October 2018 to review the mechanical services in connection with the issue of the AFSS, he then met with the owner’s expert, Paul Jones, in January 2019 to “discuss the mechanical and fire safety at the building”. All Van Oort invoices post-dated commencement of the proceedings. There was no evidence that any of these later claims arose as a result of complaints from lot owners. To the extent that the owner wished to claim Mr Yedalian’s professional fees and the Van Oort invoices as damages, it must establish that the fees were incurred as a direct result of necessary remediation work, as distinct from investigation. Otherwise, those fees could only be recovered as costs of the legal proceedings.

4. [107]

   Further, the defendants submitted that, for the most part, the works the subject of these invoices were not particularised in the Scott Schedule: r 15.2, Uniform Civil Procedure Rules 2005 (NSW). The practical effect of this was said to be that the necessity or reasonableness of most of the items were not considered by the parties’ experts: quantum report at [852(a) and (d)]. Notwithstanding this, the referee held at [887] of the quantum report:

5. [108]

   The defendants submitted that this was contrary to another ruling of the referee on 19 September 2022 (reproduced at [26]) and a portion of his liability report (at paragraphs [23]-[25]) that any Items which were not detailed in the Scott Schedule would be ignored. The defendants submitted that they proceeded in accordance with the referee’s rulings, which were then ignored, diluting their right to natural justice. The defendants were said to have been denied the opportunity of adducing evidence from their own expert and seeking admissions from the owner’s expert regarding the necessity and reasonableness of these claims.

6. [109]

   The defendants submitted that the owner failed to establish any nexus between the invoices and the defects, where the invoice evidence amounted to assertions: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd and Ors (2004) 219 CLR 165; West Boat Builders Pty Ltd v Cull Holdings Pty Ltd (2000) 16 BCL 21. The same objections were made in respect of the Van Oort invoices. Further, the defendants submitted that a significant portion of the invoices related to works which were not necessary. For example, Item M7 was found not to be a defect. The referee erred in treating this claim as costs incurred by reason of a ‘loss of confidence’ in the builder.

7. [110]

   The owner submitted that Mr Yedalian was not relied upon as an expert in the proceedings, although he was relevantly qualified. The fact that the invoices were issued after the litigation commenced did not mean that the costs incurred were for the proceedings rather than for rectification works. This was a matter of fact for the referee to determine on the evidence, and there was no relevant error in that regard. The referee first considered the actual costs referable to Mr Yedalian that were included in the Scott Schedule and then those invoices that were not included in the Scott Schedule, giving careful consideration to the scope of works that was proposed to be undertaken having regard to the face of the invoices in respect of particular rectification costs. There was no basis for the court to revisit this finding of fact having regard to the amount in issue: Chocolate Factory Apartments.

8. [111]

   The owner submitted that these costs were always part of the owner’s claim pleaded in paragraph C18 of the List Statement. Mr Yedalian’s costs were referred to in the Scott Schedule in Items F1 and F7, which related to fire safety defects identified by the experts and attended to by Mr Yedalian. That was sufficient. (The builder rejoined that it was a case of Mr Yedalian saying that his evidence came within the Scott Schedule but was not in the Scott Schedule prepared with reference to his evidence so that the experts could consider it; this was why it was objected to.) The claim was the subject of affidavit evidence served over a year before the quantum hearing. The use of the Scott Schedule was intended to facilitate the efficient conduct of the proceedings, not to exclude claims the subject of pleadings and evidence. Nor was there any prejudice to the builder where it was on notice of the claim and the evidence, had ample opportunity to address the invoices and did so.

9. [112]

   The owner disputed that the referee had made a ruling that any items not included in the Scott Schedule would be ignored. Rather, the Scott Schedule was to be utilised to address the position of the parties’ experts in respect of the defects, which position would ultimately be developed further during the hearing before the referee. The part of the transcript relied on by the defendants concerned the joint report of experts as to water ingress. The defendants objected that the joint report sought to introduce “new items”. The referee’s observation as to Scott Schedule concerned the expert evidence, not lay evidence of the actual costs claimed.

10. [113]

    The owner rejected the notion that the referee relied on the concept of ‘urgent works’ in the manner suggested. The referee stated that the owners had put the builder on notice that the owners would proceed with certain works by engaging Mr Yedalian and seek to recover the actual costs incurred. The referee did not conclude that the rectification costs were incurred because they were ‘urgent’, but simply that the rectification works were performed. Whilst the referee made comments that rectification works in relation to fire safety and water ingress were ‘urgent’, those comments arose from assertions by the parties in their correspondence that works were ‘urgent’ and the absence of evidence from the builder contradicting the owner’s position that the works were urgent.

Principles

1. [114]

   The Scott Schedule was devised in the 1920s by Judge George Alexander Scott QC, who sat as an official referee in the High Court of Justice of England and Wales: Richard Manly SC, “The Use of Scott Schedules in Technology, Engineering and Construction Litigation” (2011) 27 Building and Construction Law Journal 151. The purpose of a Scott Schedule was explained by Judge Mazza in Dale v Dennis [2005] WADC 49 at [5]:

2. [115]

   So far as the rules of this Court are concerned, rr 2.1 to 2.3 of the UCPR give power to give directions to achieve the “just, quick and cheap disposal of the proceedings”, including directions for the filing of Scott Schedules in r 15.2: r 2.3(d). Part 15 of the UCPR concerns “Particulars”. Rule 15.2 provides:

3. [116]

   The approved form is Form 13: Scott Schedule.

4. [117]

   Like any particulars, a Scott Schedule can be amended "at any stage of proceedings" having regard to the dictates of justice and for the purpose of determining the real questions raised by the proceedings, correcting defects or errors, and avoiding multiplicity of proceedings: ss 58, 64(2), Civil Procedure Act. As the learned authors of Ritchie’s Uniform Civil Procedure (NSW) observe at [s 64.50]:

5. [118]

   Absent a direction by the Court to the contrary, a Scott Schedule is like any particulars such that, should a party wish to adduce evidence or contend a proposition which is not adequately disclosed in the Scott Schedule, the usual considerations apply as to whether that ought be permitted, including having regard to the stage of the proceedings and the ability of the opposing party to meet that additional evidence or contention.

Consideration

1. [119]

   In the Summons and Technology and Construction List Statement, the owner pleaded:

2. [120]

   No further directions were made by the Court in respect of a Scott Schedule. Rather, Hammerschlag J considered “that the referee should determine whether the plaintiff should serve a Scott Schedule in accordance with UCPR rule 15.2.” Whether the referee made any directions in this regard is not known.

3. [121]

   According to the liability report, the referee was provided with a Scott Schedule by the defendants on 17 April 2022, which was updated on 27 April 2022. Further, the referee noted at [24]-[25]:

4. [122]

   The suggestion that, by these paragraphs, the referee made plain that any items not in the Scott Schedule would be ignored is difficult to understand. Nor did the referee’s comment in September 2022 (see [26]) amount to a “ruling” that, if an item was not referred to in the Scott Schedule, it would not be considered. The referee said nothing about loss and damage sought to be recovered under other portions of the pleading. The owner’s claim for Mr Yedalian’s invoices and the invoices attached to Mr Van Oort’s affidavit clearly fell with paragraph 18, particulars (i) and (ii) of the Technology and Construction List Statement.

5. [123]

   Nor do I accept that the defendants were denied natural justice, where the owner served affidavits from Mr Yedalian well in advance of the hearings. The claim for these expenses was particularised in prayer 18 of the Technology and Construction List statement. The affidavits made plain, if there was any doubt about it, that the owner sought to recover Mr Yedalian’s invoiced amounts. Mr Yedalian was cross-examined by the defendants’ senior counsel at length.

6. [124]

   As to whether Mr Yedalian’s invoices or the invoices annexed to the affidavit of Mr Van Oort were, in fact, in respect of “costs associated with the repair of the Defects” as opposed to the costs of litigation, the referee was not bound by the rules of evidence. It is clear from the referee’s report that he closely examined each and every invoice and formed a view. Whether that view was right or wrong, it was clearly available to the referee and is no basis to reject the report.

MINOR ERRORS

1. [125]

   By prayer 13, the builder contended that the referee made clerical errors in calculating the quantum for Item 88, Item 99 and Item F1 in the Scott Schedule, at paragraphs [592]-[594] and [595]-[597] of the quantum report. The defendants sought an order that Item 88 be reduced to $38,046, Item 99 be reduced to $315 and Item F1 be reduced to $14,245.

2. [126]

   The owner did not initially address these items by reason of the minor amounts involved, but have since done so at my request.

Scott Schedule Item 88

1. [127]

   The parties agree that the referee made a mathematical error and agrees that the correct quantum for this item is $42,299.95.

Scott Schedule Items 99-106

1. [128]

   The referee found that Items 99 and 100 (in respect of gaps in the air conditioning vents on Level 2 and 3) were defects and found that Item 101 (hole where a light was removed) was not. Items 102-106 were not pressed by the owner.

2. [129]

   The defendants submitted that in Annexure C for Items 99-106, the referee included the costs for the rectification method for the vent, louvre, grill, light (in rows 11-48), being those costings relating to the rectification of Items 99 and 100. However, at row 49 (coloured in green), the referee noted, “[f]or gaps exceeding 2mm in width in plasterboards – not addressed in Goldsteins Liability Report” and everything below that ‘green line’ relates to the rectification methodology for gaps exceeding 2mm, that is, the works associated with Items 102-106. As those Items were not pressed by the owner, the defendants’ submitted, that those costs ($1,615) should not have been included.

3. [130]

   The owner did not agree that the amount awarded included items 102 to 106. Although the referee’s reasoning in the quantum report at [595] to [597] was brief, the referee referred to the experts’ assessment of the total costs to rectify “these defects”. The experts agreed on the cost of rectification of the gaps and finishes in linings for common property on levels 2 and 3 (that is, Scott Schedule items 99 and 100), which agreed costing was $2,016 (excluding GST). This was ultimately reduced to $1,930 (excluding 0GST) by the referee. The owner submitted that the defendants had misread the spreadsheet. The items above the ‘green line’ in the spreadsheet related to the removal and reinstallation of elements which may be fixed to the linings the subject of items 99 and 100 that require repair or replacement.

4. [131]

   After the liability report was issued, the owner’s quantity surveyor provided an updated report, calculating the cost of rectification of Items 99 and 100 at $2,016. The defendants’ quantity surveyor, Mr Madden, completed a report in reply, putting the figure at $401. Mr Madden explained the difference between the experts by reference to the liability report at [533], where the referee stated:

5. [132]

   Mr Madden noted that the other steps and method of rectification identified and costed by the owner’s expert were not listed at [533], and thus were costed at $0, but “If this item is deemed to be required, I agree with the [owner’s expert] cost”.

6. [133]

   In “Annexure C – the final spreadsheet” annexed to the referee’s quantum report, the referee allowed $1,930.16 in respect of Items 99-100. In a more detailed spreadsheet (referred to by the parties in their submissions), the referee set out the costs associated with the method of rectification which had been itemised in his liability report at [533] and then, below a coloured line with the explanation “For gaps exceeding 2mm in width in plasterboards – not addressed in Goldsteins Liability Report”, proceeded to cost the steps in the method of rectification which had been set out by the owner’s quantum expert but no specifically listed in the liability report.

7. [134]

   As I read it, the referee was addressing the query raised by the defendants’ quantum expert as to whether these additional steps were in fact meant to have been included, in which case the defendants’ quantum expert agreed with the costings of the owner’s expert. The total figure was not in respect of items which were either found not to be a defect, or not pressed by the owner, being Items 101-106 but all related to Item 99 and Item 100. No change need be made to the referee’s calculations on this account.

Yedalian Costs (F1) ($3,050)

1. [135]

   The parties agreed that the referee had made a mathematical error, double-counting an invoice of $3,050.

2. [136]

   In the result, save for the agreed corrections, I consider that the ultimate interests of justice are served by the adoption of the referee’s reports in whole, including having regard to the principles s 56 of the Civil Procedure Act: Woolf v 52 Birriga Road at [29].

ORDERS

1. [137]

   For these reasons, I make the following orders:

   1. (1)

      Order pursuant to r 20.24 of the Uniform Civil Procedure Rules 2005 (NSW), that the following sections of the report of Steven Goldstein, Referee, dated 11 June 2024 be varied:

   2. (2)

      Subject to Order 1, the reports of Steven Goldstein, Referee, dated 24 March 2023 and 11 June 2024, prepared pursuant to the orders for reference made by his Honour Justice Stevenson on 1 October 2021 are wholly adopted by the Court in accordance with r 20.24(1)(a) of the Uniform Civil Procedure Rules 2005 (NSW).

   3. (3)

      Judgment for the plaintiff in the amount of $1,952,984 (exclusive of GST).

   4. (4)

      Order the defendants to pay the plaintiff’s costs of the Notice of Motion filed on 12 July 2024 and the Notice of Motion filed on 16 July 2024.