The Owners Strata Plan 57504 v Building Insurers' Guarantee Corporation

The plaintiff (the Owners Corporation) is the owners corporation of a strata title development at Redfern (the development). The defendant (the Guarantee Corporation) is a statutory corporation representing the Crown in right of the State of New South Wales. The Guarantee Corporation was created in substance for the purpose of administering claims against insolvent insurers that the State is required to meet pursuant to s 103I of the Home Building Act 1989 (HB Act).

The development was brought into being by the conversion of a warehouse into 111 residential lots and a small number of commercial lots. The conversion, which on any view included residential building work for the purposes of the HB Act, was carried out by a company known as Waller Constructions Pty Limited (the builder). That company is now under external administration. That work was insured, as required by s 92 of the HB Act . The insurer was HIH Casualty and General Insurance Limited (HIH). HIH is now in liquidation. There is no doubt that HIH is an insolvent insurer for the purposes of the HB Act.

The Owners Corporation asserts that much of the work done by the builder was defective. It has made a claim against the Guarantee Corporation. The Guarantee Corporation appears to accept that it is liable to pay an amount of about $760,000.00. It disputes the balance of the Owners Corporation’s claim.

The dispute was referred to a referee for inquiry and report. The referee has delivered his report to the Court. He concluded that: (1) the Owners Corporation had made good the bulk of its claim; and (2) the Guarantee Corporation was liable to indemnify the Owners Corporation in the amount of $2,045,660.40.

The Owners Corporation seeks orders that the report be varied in three respects and that, as varied, it be adopted; and that it have judgment for the amount so ascertained. The Guarantee Corporation seeks an order that the report be rejected, and that the proceedings be dismissed. Alternatively, it seeks an order that the report be varied by reducing the total found by the referee for rectification costs. It appears that this alternative prayer for relief relates to a head of claim the quantum of which had been agreed between the parties. The referee apparently overlooked that agreement, and found in favour of the Owners Corporation for a substantially higher sum. The Owners Corporation accepts that the report must be varied to give effect to the agreement in question. That is one of the variations that it seeks.

Additionally, the Guarantee Corporation seeks leave to file an amended list response. The amendments that the Guarantee Corporation wishes to make would assert that the Guarantee Corporation is not liable to the Owners Corporation because HIH would not have been liable to the Owners Corporation. Those amendments are based on terms of the insurance policy excluding liability for claims not made within seven years of completion of the residential building work; alternatively on provisions of the Home Building Regulation 1990 (as amended by the Building Services Corporation Amendment Regulation 1997) (the HB Regulation) and the terms of the policy, which are said to require that any claim be notified no later than six months after the end of the period of cover (i.e., after the expiry of seven years from completion of the work in question). I note at this point that the parties agreed on the form of the relevant provisions of the HB Act and the HB Regulation, as they stood at all times material to the issues in this case. When I quote the terms of the Act or the Regulation, I do so from the agreed copy provided by the parties.

Logically, the question of the amendment needs to be dealt with before the question of adoption. Accordingly, I now turn to the application for leave to amend. The application for leave to amend Factual context

The residential building work in question was undertaken by the builder for a developer, Stellait Pty Limited (the developer). Contrary to s 7 of the HB Act, it appears that if there were a contract between the developer and the builder, it was not in writing. It seems to me to be clear, despite the submissions of Mr Lynch of counsel (who appeared with Mr O’Keefe of counsel for the Guarantee Corporation) that there must have been some contract between the developer and the builder.

The builder’s work appears to have been substantially, or practically, complete on about 25 June 1998. On that date the Council of the City of South Sydney, which was the responsible authority, issued a certificate of classification for the purposes of the Local Government Act 1993 and the Building Code of Australia. The strata plan was registered about three weeks thereafter. The insurance

The insurance was effected by the issue of a certificate of insurance on about 31 July 1997 (shortly before the commencement of work) pursuant to a master policy. Clause 5.6(ii), endorsed on the reverse of the certificate, recorded that HIH would not be liable for claims “made by the Beneficiary more than… six (6) months after the Beneficiary first became aware or ought reasonably to have [become] aware of the facts or circumstances under which the claim arises; limited in all cases to seven (7) years from the date of Completion”.

“Completion” was defined to mean the date of completion of the work under the contract, or if no date was specified, the date of final inspection of the work by the relevant council.

The certificate stated that it was issued at the request of the “Contractor” – i.e. the builder. It named “SP57504” as the “Beneficiary”. I have no idea how this could have been done, in circumstances where the strata plan was not registered until almost a year after the date on which the certificate was issued. Nonetheless, the certificate was signed, or purportedly signed, on behalf of the “Beneficiary”. I suspect that what happened was that a representative of the developer signed the certificate purporting to do so on behalf of the “Beneficiary”, and that the reference to “SP57504” was added on or shortly after 15 July 1998, when the strata plan was registered. However, there is no evidence before me (apart from the bare form of the certificate and the fact of signature) from which inferences to the effect of my suspicions could be drawn. Accordingly, I think, they should remain no more than suspicions.

The master policy provided by cl 3.2 that certificates of insurance issued under it should “entitle the Beneficiary to make a claim in accordance with the terms and conditions of this policy for a period not exceeding seven (7) years from the date of Completion”.

Clause 5.13.2 of the master policy was effectively identical to cl 5.6(ii) of the certificate. The definition of “Completion” under the master policy was effectively identical to the definition of that term in the certificate. The HB Regulation

At material times clause 39F of the HB Regulation read, so far as is relevant: 39F Time limits for notice of loss or damage (1) An insurance contract must contain a provision to the effect that the insurer may not reduce its liability under the contract or reduce any amount otherwise payable in respect of a claim merely because of a delay in a claim being notified to the insurer if the claim is notified within the period set out below: (a) except as referred to in paragraph (b), not later than 6 months after the beneficiary first becomes aware, or ought reasonably to be aware, of the fact or circumstance under which the claim arises, or … (3) If a beneficiary gives notice of a defect to the insurer, the beneficiary is taken for the purposes of the insurance contract to have given notice of every defect to which the defect is directly or indirectly related, whether or not the claim in respect of the defect that was actually notified has been settled.

Paragraph (b) of sub-clause (1) is irrelevant. The proposed amendment

The case that the Guarantee Corporation wishes to make, as asserted by its draft amended list response, is that completion occurred on 2 July 1998. The precise date does not really matter. It is convenient to approach this aspect of the dispute on the basis, (which is one of the alternatives suggested in the submissions for the Guarantee Corporation) that the seven year period of indemnity expired, at the latest, on 14 July 2005.

The Owners Corporation is said to have given two notifications, one on about 26 May 2003 and the other on about 22 October 2003. It is the Guarantee Corporation’s case that neither of those claims raises what is the single biggest issue (as to defects) between the parties, and is the single biggest part of the claim and the amount allowed by the referee: the replacement of timber hobs. I deal with this at [89] to [145] below.

One issue between the parties is whether the defects alleged in relation to the timber hobs were “directly or indirectly related” to the defects that the Owners Corporation did notify (see cl 39F(3) of the HB Regulation). That is a question of fact. It is not one that I can resolve on the application for leave to amend. Delay

As I have said, notifications were given in 2003. Proceedings were commenced in the Consumer, Trader and Tenancy Tribunal on 19 November 2004. They were transferred to this Court, and the Owners Corporation’s summons was filed on 28 July 2006. The Guarantee Corporation filed its “defence” on 31 August 2006.

On 14 December 2007, the Court made an order referring the matter out to the referee. The referee required the parties to provide him with a statement of legal issues. It was not until the Guarantee Corporation gave the referee its statement of legal issues, on 19 February 2008, that the issues now sought to be raised by amendment were first notified to the Owners Corporation.

The Owners Corporation objected to those issues being raised. Accordingly, the Guarantee Corporation filed its notice of motion for leave to amend on 5 March 2008. That notice of motion was returnable on 14 March 2008. In the meantime, on 7 March 2008, the hearing before the referee had commenced. Evidence and submissions were completed by 23 April 2008.

When the notice of motion came before the Court, the parties agreed that the referee should hear all issues save those sought to be raised by the amendment. The Court amended the order for reference accordingly, and stood over, until after the referee had delivered his report, the hearing of the notice of motion.

The Guarantee Corporation offers no explanation of its delay in seeking to raise the amendment. Of course, a failure to explain delay does not mean that leave to amend should be refused, anymore than the giving of an explanation for delay means that leave must be granted. The power to allow amendment

The power to permit a party to amend is found in s 64 of the Civil Procedure Act 2005 (CPA). So far as is relevant, that section reads as follows: 64 Amendment of documents generally (1) At any stage of proceedings, the court may order: (a) that any document in the proceedings be amended, or (b) that leave be granted to a party to amend any document in the proceedings. (2) Subject to section 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect or error in the proceedings and avoiding multiplicity of proceedings.

By CPA s 51(1), the Court, in considering an application for amendment, “must seek to act in accordance with the dictates of justice”. Section 58(2) spells out how the Court is to undertake that task. Reference is made to CPA ss 56 and 57. I set out ss 56 and 58: 56 Overriding purpose (1) The overriding purpose of this Act and of rules of court , in their application to civil proceedings , is to facilitate the just, quick and cheap resolution of the real issues in the proceedings. (2) The court must seek to give effect to the overriding purpose when it exercises any power given to it by this Act or by rules of court and when it interprets any provision of this Act or of any such rule. (3) A party to civil proceedings is under a duty to assist the court to further the overriding purpose and, to that effect, to participate in the processes of the court and to comply with directions and orders of the court . (4) A solicitor or barrister must not, by his or her conduct, cause his or her client to be put in breach of the duty identified in subsection (3). (5) The court may take into account any failure to comply with subsection (3) or (4) in exercising a discretion with respect to costs . 58 Court to follow dictates of justice (1) In deciding: (a) whether to make any order or direction for the management of proceedings, including: (i) any order for the amendment of a document, and (ii) any order granting an adjournment or stay of proceedings, and (iii) any other order of a procedural nature, and (iv) any direction under Division 2, and (b) the terms in which any such order or direction is to be made, the court must seek to act in accordance with the dictates of justice. (2) For the purpose of determining what are the dictates of justice in a particular case, the court : (a) must have regard to the provisions of sections 56 and 57, and (b) may have regard to the following matters to the extent to which it considers them relevant: (i) the degree of difficulty or complexity to which the issues in the proceedings give rise, (ii) the degree of expedition with which the respective parties have approached the proceedings, including the degree to which they have been timely in their interlocutory activities, (iii) the degree to which any lack of expedition in approaching the proceedings has arisen from circumstances beyond the control of the respective parties, (iv) the degree to which the respective parties have fulfilled their duties under section 56 (3), (v) the use that any party has made, or could have made, of any opportunity that has been available to the party in the course of the proceedings, whether under rules of court , the practice of the court or any direction of a procedural nature given in the proceedings, (vi) the degree of injustice that would be suffered by the respective parties as a consequence of any order or direction, (vii) such other matters as the court considers relevant in the circumstances of the case. Absence of explanation

I have noted already that the Guarantee Corporation offers no explanation for the delay in seeking the amendment. It is however clear that its legal advisers were aware of cl 5.6(ii) of the Certificate of Insurance as far back as June 2007. On about 22 June 2007, the Guarantee Corporation instructed its current solicitors, and the “file” (which apparently comprised about twenty lever arch folders) was transferred by the former solicitors to the current solicitors. Mr Geary, a solicitor in the employ of the current solicitors, swore an affidavit dated 27 June 2007. In paragraph 21 of that affidavit he said, relevantly: Amended List Response 21. The Defendant will be required to file an Amended List Response. That document will need to amend the current List Response to incorporate at least 3 exclusion clauses under the Policy terms and conditions with HIH, namely: a. Clause 5.6(ii) in respect of claims six (6) months after the Beneficiary first became aware or ought reasonably to be aware of the fact or circumstances under which the claim arises; …

It may be accepted that the particular matter which excited Mr Geary’s attention was the first part of cl 5.6(ii), providing a limitation on the time to make claims. However, it is scarcely conceivable that Mr Geary would not have read the whole of the clause (indeed, the whole of the certificate). Although Mr Geary has sworn a subsequent affidavit, he has not sought to explain how it is that he did not appreciate the significance of the whole of cl 5.6(ii), if indeed it should be the case that he did not.

In the event, and despite what Mr Geary had said in his affidavit of 27 June 2007, the Guarantee Corporation did not file an amended list response.

The question of absence of explanation was raised by Mr Anderson, a solicitor in the employ of the solicitors for the Owners Corporation, in an affidavit sworn, in opposition to the application for leave to amend, on 9 July 2008. Paragraph 23 of that affidavit (the whole of which was read without objection) stated that the Owners Corporation “has never explained the delay in making the application to amend”. Issues that would arise if leave granted

The Owners Corporation has provided a draft reply to the draft amended list statement. Clearly enough, if leave were granted to amend, it would be necessary to permit the Owners Corporation to file a reply. The draft reply flags four issues: (1) the Owners Corporation would not admit that the documents said to constitute the policy do in fact accurately reflects its terms. That can be put to one side, as there is now evidence from which the Court could conclude that the terms of the policy do include those on which the Guarantee Corporation seeks to rely; (2) alternatively, the Owners Corporation would contend, the clauses on which the Guarantee Corporation would rely are void by reason of s 103D of the HB Act. Thus, it submits, leave to amend should not be granted because the amendment is obviously futile; (3) alternatively, the Owners Corporation would contend, the notifications that it did give within the seven year period were sufficient or effective notifications of the timber hob issue, having regard to the substance of the notifications and cl 39F(3) of the HB Regulation; and (4) alternatively, the Owners Corporation would contend, the builder returned to the site to carry out rectification works in 2002 (Mr Lynch, in his oral submissions, said that this was common ground) so that, by virtue of cl 39A of the HB Regulation, the residential building work in question is not to be taken to have been complete until that time in 2002. On any view, the claims were made within a seven year period commencing in 2002.

Although Mr Neal of counsel, who appeared for the Owners Corporation, submitted that the first, third and fourth of those issues would raise questions of fact, it is I think the case that only the third does so: at least to any significant extent. As I have noted, there is evidence sufficient to prove the terms of the policy documents. Although the Owners Corporation wishes to put the Guarantee Corporation “to strict proof” of those terms, the evidence that has been produced is capable of proving the relevant terms (I express no view as to the existence of any legal requirement for “strict proof”). The only factual question in relation to the fourth issue is whether the builder returned to the site in 2002. That is, or will be, admitted.

Thus, the only question of fact that would require consideration, if leave to amend were granted and the reply in question were filed, is whether the notifications in fact given within the initial seven year period (running from July 1998) were sufficient or effective notifications of the timber hob issue, bearing in mind cl 39F(3). Analysis: discretionary matters

I propose to deal first with the discretionary considerations on which Mr Neal relied, and then to turn to the legal issues. The parties’ submissions

Mr Neal relied on the history to which I have referred, and on the absence of explanation. He noted that the amount affected by the amendment was substantial – as I have said, about $1.2 million. He noted also that the Guarantee Corporation had turned its mind expressly to cl 5.6(ii) of the certificate as long ago as June 2007.

Further, Mr Neal submitted, if leave to amend were to be granted, there would have to be a further hearing to deal with the questions of fact that would arise. He submitted that to permit the amendment, and thus to require a further hearing to resolve further questions of fact, would not be conducive to the overriding purpose set out in CPA s 56(1).

Mr Neal submitted that this was not just a question of prejudice that could be cured by an order for costs. More fundamentally, he submitted, even if that were the only prejudice that the Owners Corporation would suffer by reason of the grant of leave to amend, that did not dictate that leave should be given. He referred to the decision of the Court of Appeal in Dennis v Australian Broadcasting Corporation [2008] NSWCA 37. In that case Spigelman CJ, with whom Basten and Campbell JJA agreed, said at [28] and [29] that the principles established by the decision of the High Court of Australia in State of Queensland v JL Holdings Pty Limited (1997) 189 CLR 146, whilst remaining a binding statement of the common law principles applicable to applications for leave to amend, must be taken in this state to operate subject to the statutory duty imposed on courts by CPA s 56. His Honour said that the statutory duty imposed by s 56(2) “constitutes a significant qualification of the power to grant leave to amend the pleading under [CPA] s 64”.

Mr Lynch submitted that the only question of fact that would arise was that as to the sufficiency or effect of the notifications that were given, bearing in mind cl 39F(3) of the HB Regulation. He submitted that a resolution of that question of fact would not be difficult or extensive, and could be conducted principally, if not entirely, by examining the notifications that were given and comparing them to the description of the defects alleged in relation to the timber hobs.

More generally, Mr Lynch submitted, any prejudice occasioned by the late bringing of the application for leave to amend could be cured by moulding appropriate orders for costs.

Mr Lynch submitted that, even bearing in mind the regime now imposed by CPA s 56, and its effect on the power to give leave to amend conferred by CPA s 64, the interests of justice still remained the primary consideration. In this case, he submitted, it was necessary to bear in mind the substantial amount affected by the amendments and that its resolution, requiring attention only to limited issues of fact and otherwise to questions of law, could be undertaken quickly and cheaply.

Further, Mr Lynch submitted, if it were necessary to remit the matter to the referee in relation to the cost of tiling works (something with which I deal at [146] to [168] below) then a resolution of the issues sought to be raised by the amended reply would not delay the ultimate resolution of the issues between the parties. Decision

I do not accept the propositions that the only prejudice to the Owners Corporation is a prejudice relating to costs, and that this prejudice can be cured by appropriate costs orders. The dispute between the parties has been alive for more than five years (I leave aside, for the moment, the question of whether that dispute extended, at the outset, to the timber hobs). Litigation in relation to the dispute has been on foot since November 2004. I do not know when the issue relating to the timber hobs was first raised. If the evidence reveals the date, the parties did not refer me to the relevant part of the evidence; and in accordance with my usual practice, I had stated that I would not go to parts of the voluminous material tendered to which neither counsel took me. In any event, from the time that the timber hobs became part of the litigious controversy, the dispute was conducted as one of fact: were they defective or not? If they were defective, what was the appropriate method of rectification?

The Owners Corporation prepared its case on the basis that the relevant issues were issues of fact. It was entitled to proceed on the basis that if those issues of fact were resolved in its favour then it would succeed.

I do not know what attitude the Owners Corporation would have taken had it been told, at an appropriate time, that there was said to be a legal answer to this aspect of its claim: on the Guarantee Corporation’s case, a complete answer. The Owners Corporation might have persisted with the litigation (including the dispute relating to the timber hobs). Alternatively, it might have sought to resolve its dispute with the Guarantee Corporation. However, it has acted on the basis of the issues as (at least until 19 February 2008) they had been articulated, and on the basis of the advice that it had received in relation to its prospects on those issues. Presumably, the Owners Corporation gave consideration to its financial exposure by reference to those issues and that advice. No doubt, the individual proprietors (who of course stand behind the Owners Corporation, and whom in substance it represents) did the same.

If leave to amend were granted, and the point raised by amendment proved to be fatal, it would be necessary to consider what the appropriate costs order should be. I do not think that an order simply giving the Owners Corporation its costs of and incidental to and thrown away by the amendment would be sufficient. In the majority of cases, that order is sufficient. But the majority of cases do not raise the question of an application for leave to amend heard and determined after there has been a reference in which all other issues in dispute were argued and considered, and after the referee’s report was handed down.

It may be that any consideration of the interest of justice, in relation to the Owners Corporation, would require it to be compensated on the indemnity basis for whatever costs it incurred (or became liable to pay) after the time when the issue now sought to be raised should have been raised. That would require in effect a resolution of the issues to be raised by the amendment and then a consideration of the hypothetical question – what would the Owners Corporation have done had those issues been raised at an appropriate time?

I do not accept that the interest of justice, as between the parties, require the sort of exercise that I have just described to be undertaken. Nor do I think that it is one required in the performance of the Court’s obligation to seek to give effect to the overriding purpose set out in CPA s 56(1).

In my view, when the balance lies between granting an indulgence to a party that has not explained the factual basis on which the indulgence is tardily sought, and causing real prejudice to the opposing party (including by conducting the sorts of inquiries that I have just outlined), the Court is justified in refusing to grant the indulgence.

These considerations are of themselves sufficient to warrant refusal of the application for leave to amend. Analysis: futility

I turn now to the legal issue – the suggested futility of the amendments sought. This aspect of the debate requires consideration of cls 3.2, 3.3 and 5.13.2 of the master policy. The terms of the policy

The effect of cl 3.2 is that certificates of insurance issued under the master policy should not give an entitlement to make a claim for a period more than seven years from the date of “Completion”. The effect of cl 3.3 is to limit the seven year period to twelve months in the event of a claim relating to failure to complete residential building work. I set out those clauses: 3.2 All Certificates of Insurance issued hereunder by the Contractor in favour of a Beneficiary shall entitle the Beneficiary to make a claim in accordance with the terms and conditions of this policy for a period not exceeding seven (7) years from the date of Completion. 3.3 In respect of claims made as a result of an event happening as described within Insuring Agreement 1.1 the period specified in Clause 3.2 above is restricted to twelve (12) months after the failure to commence, or cessation of the work detailed within the Certificate of Insurance issued hereunder.

The effect of cl 5.13.2 is that HIH is not liable for any claim by a “Beneficiary” made more than six months after that Beneficiary first became aware, or should have become aware, of the circumstances from which the claim arises, with a limit in all cases of seven years from the date of Completion. I set out that clause: Insurers shall not be liable to pay any claim made against The Contractor or directly against this policy by the Beneficiary, under this policy or any Certificate of Insurance issued under this policy:- … 5.13 made by the Beneficiary more than:- … 5.13.2 for all other claims six (6) months after the Beneficiary first became aware, or ought reasonably to be aware of the circumstances under which the claim arises in all cases limited to a maximum of seven years from the date of Completion.

To the extent that the debate also requires consideration of cl 5.6(ii) of the certificate of insurance, there is no need to set it out. As I have noted at [14] above, it is not materially distinguishable from cl 5.13.2 of the master policy. The parties submissions

In substance, Mr Neal’s submission for the Owners Corporation was that the policy imposed a limit on the time for making claims that was not permitted under the HB Act or the HB Regulation.

It is not so easy to state, or to summarise, the submission of Mr Lynch in reply. However, as I understood it (and an understanding of the submission was not facilitated by the constantly shifting grounds on which it was based, and terms in which it was expressed), it was to the effect that: (1) the policy was a “claims made and notified” policy, so that a claim could only be made during the period of insurance stipulated by the policy (relying, Mr Lynch said, on what Sheller JA, in whose reasons Spigelman CJ and Meagher JA concurred, had said in Gosford City Council v GIO General LTD (2003) 56 NSWLR 542 at 552. In fact, as even desultory reading of his Honour’s judgment makes clear, his Honour was quoting from the joint judgment in FAI General Insurance Co Ltd v Australia Hospital Care Pty Ltd (2001) 204 CLR 641 at 659 – 660, but this does not detract from the authority of the proposition on which Mr Lynch relied); (2) an insured in the position of the Owners Corporation did not suffer damage until the damage first became manifest; (3) the Owners Corporation had not become aware of the damage within seven years after completion; (4) accordingly, it had not suffered loss within the period of indemnity offered by the policy, and had no entitlement to make a claim.

As I understand it, this submission, although not expressly so limited, should be taken to refer to the issue of the allegedly defective timber hobs.

Alternatively, Mr Lynch submitted, the relevant provisions of the HB Act and the HB Regulation did authorise the terms of the policy (and the certificate) that were central to the proposed amendment. The legislation

To understand the submissions, and to resolve this issue, it is necessary to look at the relevant terms of the HB Act and the HB Regulation.

Section 92(1) of the HB Act made it necessary for the performance of residential building work under a contract to be insured. The subsection read: 92 Contract work must 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.

Section 99(b) provided that a contract of insurance relating to residential building work must insure the person for whom the work is done, and that person’s successors in title, against the risk of loss arising from a breach of statutory warranty. It read: 99 Requirements for insurance for residential building work A contract of insurance in relation to residential building work required by section 92 must insure: … (b) a person on whose behalf a 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.

Section 103B dealt with the period of cover. By subs (2), it provided that a contract of insurance must provide cover for at least seven years from the date of completion of the work. By subs (3), it provided that the regulations could specify the period within which a claim must be made. It read: 103B Period of cover (2) A contract of insurance must provide insurance cover for other loss insured in accordance with this Act for a period of not less than 7 years after the completion of the work or the supply of the kit home, or the end of the contract relating to the work or supply, whichever is the later. (3) This section is subject to any limits set out in the regulations as to the period within which a claim must be made.

Section 103C(1) authorised the Governor to “make regulations for or with respect to requirements for insurance required to be entered into under this Part”.

Section 103D provided that “[a] provision of a contract or another agreement that purports to restrict or remove the rights of a person under this Part is void”.

Clause 39A of the HB Regulation dealt with the question of when residential building work should be taken to be complete. It provided for three alternatives: (1) the date of completion within the meaning of the contract under which the work was performed; or (2) if the contract does not deal with the question, or if there is no contract, on the date of final inspection by the applicable council; or (3) in any other case, on the latest date that the contractor attends the site to complete the work or to carry out work.

The subclause read as follows: 39A Period of cover (1) For the purposes of determining the period of cover to be provided by an insurance contract in relation to residential building work, work is taken to be complete: (a) on the date that the work is completed within the meaning of the contract under which the work was done, or (b) if the contract does not provide for when work is completed or there is no contract, on the date of the final inspection of the work by the applicable council, or (c) in any other case, on the latest date that the contractor attends the site to complete the work or hand over possession to the owner or if the contractor does not do so, on the latest date the contractor attends the site to carry out work.

Clause 39F dealt with time limits for notification of loss or damage. I have set out that clause, so far as it is relevant, at [15] above. For convenience, I repeat it: 39F Time limits for notice of loss or damage (1) An insurance contract must contain a provision to the effect that the insurer may not reduce its liability under the contract or reduce any amount otherwise payable in respect of a claim merely because of a delay in a claim being notified to the insurer if the claim is notified within the period set out below: (a) except as referred to in paragraph (b), not later than 6 months after the beneficiary first becomes aware, or ought reasonably to be aware, of the fact or circumstance under which the claim arises, or … (3) If a beneficiary gives notice of a defect to the insurer, the beneficiary is taken for the purposes of the insurance contract to have given notice of every defect to which the defect is directly or indirectly related, whether or not the claim in respect of the defect that was actually notified has been settled. Decision

Thus, the effect of the statutory scheme having regard to the relevant provisions of the HB Act and the HB Regulation is that: (1) residential building work had to be performed pursuant to a contract; (2) residential building work performed under a contract had to be insured; (3) the insurance was required to indemnify the other party to the contract, and that other party’s successors in title, against the risk of loss arising from any breach of the statutory warranties; (5) the period of insurance must be at least seven years; (6) that period of seven years was computed from the date of completion of work under the contract (thereby requiring reference to cl 39A of the HB Regulation); (7) if an insurer was notified of a claim within six months of the beneficiary’s first becoming aware of the circumstances giving rise to the claim, the insurer could not reduce its liability by reason of late notification; and (8) any contractual provision purporting to restrict or remove rights given by the HB Act was void.

One of the events to be covered by a contract of insurance was the risk of loss arising from a breach of statutory warranty. That cover must extend for at least seven years from the completion of the work in question. See, respectively, ss 99(b) and 103B(2) of the HB Act. It follows, at least prima facie, that a policy of insurance complying with the provisions of the HB Act (as they stood at the relevant time) must provide indemnity to the beneficiary for any loss sustained by the beneficiary arising from a breach of a statutory warranty, where that loss was sustained within seven years from completion of the work.

Further, when the beneficiary becomes aware of the loss (or of the circumstances giving rise to it), its claim will not be defeated if it notifies the insurer of the loss, or of the circumstances, within six months of so becoming aware.

This analysis suggests that an insurer would not be entitled to deny liability, or to reduce its liability, in the following circumstances: (1) a beneficiary suffers loss, through breach of a statutory warranty, within the seven year period; (2) the beneficiary becomes aware of that (or of the circumstances giving rise to the loss) within the seven year period; (3) the beneficiary gives notice to the insurer within six months of having become so aware; but (4) that notice, although given within the six months period, is not given until after the expiry of the seven year period.

If that analysis is correct, it must follow that cl 5.13.2 of the policy, and cl 5.6(ii) of the certificate, are void by operation of s 103D. The seven year limitation that they impose applies not only to loss sustained (which is permissible) but also to notification. The words of temporal limitation – “in all cases limited to a maximum of seven years from the date of Completion” – necessarily have the effect that a claim can only be valid if it is notified, firstly, no more than six months from the time when the beneficiary becomes aware of the relevant circumstances and, secondly, within seven years from Completion. Thus, they restrict the right of a beneficiary to be indemnified, and remove that right, in circumstances where the insured event occurred within the seven year period but notification occurred outside it although within the six month period. If the clauses are void in the circumstances that I have described, they are void for all purposes.

As I have noted, Mr Lynch submitted that the policy was a “claims made and notified” policy. Thus, he submitted, liability could only arise when two conditions were satisfied: (1) the beneficiary suffered insured loss during the currency of the policy; and (2) the beneficiary notified the insurer of that loss, or of the circumstances giving rise to it, within the currency of the policy.

There can be no doubt that, for an insurer to be liable under a “claims made and notified” policy, not only must the insured event occur during the period of insurance but also the claim must be made within that period. So much is established by the decisions to which I have referred at [55(1)] above. However, it seems to me that to analyse the issue this way is to invert the proper order of inquiry. It may be accepted that the policy is a claims made and notified policy. That is because, as I have said, the effect of cls 5.6(ii) of the certificate and 5.13.2 of the policy requires not only that the insured event occur during the period of insurance but also that the insurer be notified within that period. But the question is not one merely to be resolved by classification of the policy. It requires consideration of whether any term of the policy, on its proper construction in context, restricts or removes (or purports to restrict or remove) a beneficiary’s insurance rights under Part 6 of the HB Act. The question is to be resolved having regard to the proper construction of the relevant provisions of the legislation and of the contract of insurance, not by reference to considerations of taxonomy.

Mr Lynch’s approach to the question, taken to its extreme, would mean that if a beneficiary did not become aware, until the last day of the seven years or shortly prior thereto, that it had suffered loss (and had not earlier become aware of circumstances giving rise to that loss), it would lose its right to indemnity because it could not (and therefore did not) notify the insurer until after the expiry of that period. The submission means that in any case the expiry of the seven year period truncates the six month period for giving notice that otherwise is implicit from cl 39F(1) of the HB Regulation. I do not accept that this consequence – and others that, no doubt, could be put forward by way of example – should be attributed to the legislature.

Mr Lynch submitted also that the Owners Corporation had not suffered loss in this case until it first became aware of the defects, or of circumstances giving rise to them. This, he submitted, was outside the seven year period. Thus, he submitted, the policy did not respond.

It may be accepted that if no insured loss is sustained during the seven year period then no claim can arise. But that does not answer Mr Neal’s submission set out at [54] above.

Mr Lynch based his submission on Bryan v Maloney (1995) 182 CLR 609. As the majority (Mason CJ, Deane and Gaudron JJ) pointed out at 616, the case was argued on a number of bases, including “that damage was sustained by Mrs Maloney when the inadequacy of the footings first became manifest…”. The case concerned liability in tort for pure economic loss. It says nothing about the position of a successor in title having the benefit of ss 18C, 18D of the HB Act: a matter discussed briefly at [144] below.

I therefore conclude that the contractual provisions on which the Guarantee Corporation relies to found the defences that it wishes to introduce by way of amendment are void by operation of s 103B of the HB Act. Had I come to a different view on the question of discretion, I would have concluded that the application for leave to amend should fail on this ground.

It follows that the notice of motion for leave to amend filed on 5 March 2008 should be dismissed with costs. That conclusion applies not only to the draft amended list response annexed to that notice of motion but also to the amended draft lift response handed up by Mr Lynch in the course of argument. Adoption of the report

I turn now to the question of adoption of the report. The Court’s powers

The Court’s powers on a referee’s report are set out in UCPR rule 20.24: 20.24 Proceedings on the report (1) If a report is made under rule 20.23, the court may on a matter of fact or law, or both, do any of the following: (a) it may adopt, vary or reject the report in whole or in part, (b) it may require an explanation by way of report from the referee, (c) it may, on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report, (d) it may decide any matter on the evidence taken before the referee, with or without additional evidence, and must, in any event, give such judgment or make such order as the court thinks fit. (2) Evidence additional to the evidence taken before the referee may not be adduced before the court except by leave of the court.

There is no distinction between rule 20.4 and the former rule, SCR part 72 rule 13. The parties accepted that my statement of the applicable principles (in relation to the former rule) in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 at [6] to [8] were applicable. For convenience, I set out what I there said: 6 The principles to be applied, in exercising the discretion conferred upon the Court by Pt 72 r 13 to adopt, vary or reject in whole or in part a report of a referee, are well established. There are a number of cases to which, customarily, reference is made. They include Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; the unreported proceedings in that case before Giles J (19 May 1992: the relevant considerations referred to by his Honour are sufficiently extracted in the decision of the Court of Appeal); Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193; and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615. As to the nature and content of the referee’s obligation to give reasons, the relevant authorities include Xuereb v Viola (1989) 18 NSWLR 453 and Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885). 7 The relevant principles, distilled from those decisions, can be stated as follows: (1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing. (2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised. (3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest. (4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh. (5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report. (6) If the referee’s report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than “unsafe and unsatisfactory”. (7) Generally, the referee’s findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence. (8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based. (9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire. (10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report. (11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise. (12) The right to be heard does not involve the right to be heard twice. (13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised “by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it”. The real question is far more limited: ”to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence”. (14) Where, although the referee’s reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee’s findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence. (15) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified. 8. The twelfth point restates the aphorism of Mahoney JA in Super at 567. The thirteenth, fourteenth and fifteenth points are drawn (and include direct quotations) from the judgment of Hodgson CJ in Eq (with whom Priestley JA agreed and with whom, as to the relevant principles, Fitzgerald AJ also agreed) in Franks & Anor v Berem Constructions Pty Ltd (NSWCA 2 December 1998, unreported; BC 9806367). If I may say so with respect, I regard what his Honour said as giving content, on the facts of the particular case, to the operation of relevant principles rather than as stating any new principle.

In this case, the report in general “shows a thorough, analytical and scientific approach of the assessment of the subject matter of the reference”. Particularly in relation to the key area of dispute – the timber hobs – it appears from the report that the referee was well aware of the issues, and that he applied his mind carefully to the resolution of them.

As I have said, it was the Owners Corporation’s case that the report should be varied in three respects, and that as so varied, it should be adopted. The suggested variations to the report

The first suggested variation related to the amount of $161,957.00 awarded by the referee in respect of a “swinging stage” (see the summary at R338).

The parties had apparently agreed that the amount to be allowed for this item was $11,262.00. The referee must have overlooked that agreement. It follows that the tabulation of rectification costs, and the total quantified by the referee, should be adjusted accordingly. The net effect is a reduction of $150,695.00 in the total rectification costs calculated by the referee.

The second agreed adjustment related to engineers’ fees. The Owners Corporation had retained Cardno MBK to investigate various defects. It was agreed that that firms’ fees for the investigation (as opposed to its fees in respect of giving expert evidence) should be allowed in the sum of $5,639.15. The referee appears to have overlooked this. The total rectification costs should be increased accordingly.

The third variation sought related to the cost of tiling. Since this issue is closely connected with the issues relating to the timber hobs, I shall defer dealing with it until I have dealt with the issues relating to the timber hobs. The dispute as to the timber hobs

As I have said, the building was a converted warehouse. A number of the residential lots had inset balconies. There was no set-down from the floor level of the internal portion of the lot to the floor level of the balcony, as ordinarily there would be. The internal areas of the lots in question were separated from the inset balconies by fixed and sliding glass panels. The design specified that a concrete or brickwork hob be constructed between the interior and exterior areas of the lots concerned. On the referee’s findings, those hobs were intended to serve two functions. Firstly, they were required to carry the fixed and sliding glazing. Secondly, they were required to assist in preventing the flow of water from the balcony to the interior of the apartment.

The builder did not build a concrete or brickwork hob. Instead, it constructed the hobs out of two layers of untreated pine timber. The lower layer was affixed to the slab with “shot” fixings. The upper layer was nailed to the lower layer. In most, but apparently not all, cases an aluminium angle was affixed to the slab on the exterior side of, and abutting, the hob. The angle was affixed to the underlying slab using a silicon adhesive or sealant. (I have taken these details from the report at R65; and they are explained diagrammatically at R66. What the referee thought would have been required had a concrete hob been constructed is explained at R52, and diagrammatically at R51.) The referee’s findings

The referee found that the method of construction of the hobs breached the warranties implied by s 18B(a) and (b) of the HB Act. Those warranties are as follows: 18B Warranties as to residential building work The following warranties by the holder of a contractor licence , or a person required to hold a contractor licence before entering into a contract, are implied in every contract to do residential building work : (a) a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract, (b) a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new, …

There is no doubt that the method of construction of the hobs breached the warranty set out in s 18B(a): to the extent at least that what was done was not in accordance with the specifications. The Guarantee Corporation does not contend otherwise. It does not however accept that what was done, was done other than in a proper and workmanlike manner, or that the materials used were not good and suitable for the purpose for which they were used.

The Guarantee Corporation’s case before the referee was twofold. Firstly, it submitted, the hobs were not designed or specified to form part of the waterproofing system for the lots in question. Secondly, and alternatively, it submitted, the hobs as built had been adequately waterproofed because the aluminium angles, sealed as they were to the underlying slab, were sufficiently waterproof. The Guarantee Corporation relied on the circumstance that, from the date of completion of the work until the date of the reference, there had been no water penetration through or under the hobs. (Water penetration had occurred at the ends of the hobs, where they abutted the walls that divided one lot from another. That water penetration occurred because the builder had not adequately flashed or sealed the joint. This was an admitted defect; and on any view it had caused damage, through water penetration, over the years. However, that water penetration, being due to inadequate flashing or sealing, is conceptually distinct from water penetration through or under the hobs themselves.)

On the referee’s findings, the waterproofing system had two elements. Firstly, a waterproof membrane was laid over the slab on the balcony. It was specified to lap up over the hobs, and up and over the point where the hobs abutted the dividing walls. That membrane was tiled over. It was common ground that the membrane would fail at some time during the design life of the building as modified. The design life of the building was put (whether by agreement or by assumption I do not know) at 50 years. The life of the membrane was variously estimated, but it appears to have been common ground between the experts that it could be expected to fail within 20 years. Thus, the Owners Corporation, in the execution of its duty to maintain and repair under s 62 of the Strata Schemes Management Act 1996, would be required to replace the waterproof membranes at some time in the future. Of necessity, that replacement would require the removal and replacement of the tiles laid over it.

The referee accepted this. However, he appears to have accepted also that neither the Owners Corporation nor individual proprietors could know that the membrane had failed until there was some evidence of water penetration. I am not sure if the Guarantee Corporation accepted this proposition, but it seems to me to be a matter of common sense. Thus, the referee found, the hobs had a waterproofing role to play: secondary to the membrane, but nonetheless important. Of necessity, for the hobs to perform this role, they would have to be and remain waterproof for the design life of the building.

To the extent that there was a challenge to those findings of the referee, I reject it. They were clearly open to him on the evidence. I do not think that he in any way, let alone palpably, misused his advantage, or misunderstood the evidence. The issues

The essential issue, in relation to the timber hobs, related to the referee’s findings of breach of the warranty as to performance of the work in a proper and workmanlike manner and breach of the warranty that the materials used would be good and suitable for their purpose.

The Guarantee Corporation’s case was that there was no evidence entitling the referee to make those findings.

There was a related issue as to whether the Owners Corporation had suffered loss by reason of any breach of any statutory warranty. This issue related specifically to the referee’s conclusion (having found that there were breaches of the statutory warranties) that in the circumstances it was reasonable for the timber hobs to be removed and replaced. First issue: the parties’ submissions

Mr Lynch submitted that there was no evidence to entitle the referee to find that the warranties had been breached, because there was no evidence of water penetration through or under the timber hobs.

Mr Neal submitted that the referee had found that the timber hobs, as constructed, were less satisfactory as water barriers than the concrete or brickwork hobs for which the specification called. Thus, Mr Neal submitted, the Owners Corporation had suffered loss, because it had received something of lower quality than that specified by the contract.

Mr Lynch submitted that the position of the Owners Corporation – which was not a party to any contract with the builder – was distinguishable from the position of a party in contract with the builder. He accepted that, in the latter case, the departure from specification of itself caused damage. However, he submitted, in the case of a more remote party such as the Owners Corporation, it did not.

In response, Mr Neal relied on s 18D (and, I think, also on s 18C) of the HB Act. He submitted that the Owners Corporation, as the successor in title to the developer, was entitled to the same rights as the developer in respect of the statutory warranties (s 18D). Further, he submitted, the Owners Corporation, as the successor in title to the developer, was entitled to the benefit of the statutory warranties as if the developer had been required to hold a contractor license and had done the work under a contract with the Owners Corporation to do that work (s 18C). On either basis, Mr Neal submitted, the position of the Owners Corporation, in relation to the benefit of the statutory warranties, was no different to the position of the developer. First issue: decision

In my view, it was open to the referee to find, as he did, that the statutory warranties had been breached. The starting point was his finding that the hobs were part of the contractual waterproofing system (see R221, 309). There was a conflict in the evidence on this point. The referee considered the conflicting evidence. He gave reasons for his finding. They reveal a rational analysis of the competing expert views. It cannot be suggested that it was not open to the referee, based on the evidence before him, to make the finding that he did.

The next step in the referee’s reasoning was his finding, in relation to the waterproofing function of the hobs, that the timber hobs would not be as effective as the specified hobs. The key question here related to the aluminium flashing. The expert evidence for the Guarantee Corporation, and the submissions put on its behalf, advanced the case that the aluminium flashing was an effective barrier to water penetration because it was sealed to the underlying concrete in a way that made it impervious to moisture.

There seems to be little doubt that, if the hobs are to be considered as part of the waterproofing system, then the hobs as constructed (of untreated pine) are at least in theory inferior to the hobs as specified. That is because, as Professor Marosszeky (one of the experts called by the Guarantee Corporation) said, “the timber will rot and the other two won’t” (see R241; the reference to “the other two” is a reference to concrete or brick hobs). Thus, as the referee recognised, the aluminium angle and its method of sealing to the concrete was the key question. He dealt with this at R259 to 278. He noted that the tests undertaken by Professor Marosszeky and Mr Palmer (the other expert called by the Guarantee Corporation) showed “that there is very little actual knowledge as to the type, characteristics and the procedure for installation of the sealant which could justify certainty that the sealant was intended to be, and capable of providing, a barrier preventing water penetration horizontally under the angle” (R269).

Thus, the referee concluded, he could not be satisfied that the sealant “has the capacity which are [sic] necessarily attributed to it by Professor Marosszeky and Mr Palmer” (R270). He said that considerably more evidence, of testing and the like, would be required for him “to be satisfied that the sealant was of a composition such that it would last beyond the life of the building” (again, R270).

As I understand the referee’s reference to lasting “beyond the life of the building”, he was referring to the proposition that properly installed and built concrete or brick hobs would serve as a barrier to moisture penetration into the lots for the life of the building, in circumstances where the waterproofing membrane would fail, and thus need to be replaced, at some earlier stage. In other words, the referee was considering whether the aluminium angle, as installed, was likely to provide the same degree of protection against moisture penetration.

Again, the referee’s reasoning reveals a rational consideration of the conflicting evidence. Again, it cannot be said that the finding that he made was not open to him on the evidence. Further, as he noted at R271, there was evidence of poor installation and sealing of the aluminium angles in at least some locations. The referee took the view that this evidence, although not essential to his conclusion, supported it. Again, I think, that reasoning betrays no error.

On the basis of the findings to which I have referred, the referee concluded that the timber hobs as installed were inferior to the concrete or brick hobs as specified, because they provided a lesser degree of protection against water penetration. On that basis, he found, there was a breach of the warranty that the work (in relation to the hobs) would be performed in a proper and workmanlike manner, and that the materials used in the construction of the hobs would be good and suitable for their purpose. That conclusion was open to the referee having regard to his antecedent findings. Indeed, I would have said, that conclusion followed necessarily from the antecedent findings.

On the basis that the hobs as constructed were inferior to the hobs that should have been constructed, the referee concluded that it was not necessary, for the purpose of showing breach of the statutory warranties, that water penetration had in fact occurred (R310, 311). In my view, that analysis was open to the referee on the material before him.

It follows that, if the Owners Corporation was entitled to the benefit of the statutory warranties (the question to which I now turn), no basis has been shown for declining to adopt this aspect of the report. Second issue: the parties’ submissions

Mr Lynch submitted that the referee had erred in concluding that the timber hobs should be replaced with hobs conforming to the specification. He submitted that: (1) the position of the Owners Corporation was fundamentally different to the position of a proprietor who contracts with a builder. In the latter case, the proprietor has a contractual right to a building constructed in accordance with the plans and specifications. In the event of a departure from the specifications, the prima facie remedy of the proprietor is rectification to achieve compliance. The Owners Corporation, as a successor in title to the contracting proprietor, had no contractual relationship with the builder. The presumption in favour of rectification did not run in favour of the Owners Corporation; and (2) in any event, as a matter of fact, it was not open to the referee to conclude, as he did, that satisfaction of the contractual purpose required replacement of the non-conforming timber hobs with conforming hobs.

Mr Neal submitted that the effect of ss 18C and 18D of the HB Act was to give the Owners Corporation the same rights and remedies as would have been available to the party that contracted with the builder. Thus, he submitted, the presumption in favour of rectification ran in favour of the Owners Corporation.

Further, Mr Neal submitted, the referee’s conclusion, as to the need to replace the timber hobs, was open to him on the facts. Second issue: decision

It is convenient to deal with the factual argument first. As I have said, in considering the first issue relating to the timber hobs, the referee concluded that what was provided was inferior to that which should have been provided. For the reasons that I have given, that conclusion was open to him on the evidence, and his reasoning to that conclusion reveals no error of a kind that would justify rejection of this aspect of the report.

Once that it is understood, it is, strictly speaking, unnecessary to consider the first submission put by Mr Lynch. All that is left is the question, is it reasonable in all the circumstances to award damages on the basis that the non-compliant and defective hobs be replaced with compliant hobs?

The experts called by the Owners Corporation said that demolition of the timber hobs, and their replacement by hobs complying with the specification, was necessary to ensure that the hobs functioned as part of the waterproofing system. The experts called by the Guarantee Corporation advocated a lesser scope of work. The referee considered the competing evidence. He concluded at R320 to 322 that: (1) the scope of work advanced by the Guarantee Corporation would not satisfy the requirements of the contract (including the specification) (R320); (2) that scope of work would not meet the contractual objective (of providing hobs that would function satisfactorily as part of the waterproofing system) (R321); and (3) that scope of work involved “uncertainty and a risk that would not exist had there been original contractual compliance or complete contractual complying rectification” (R322).

In each case, the referee referred back to the sections of his report on which those conclusions were based.

In my view, those conclusions were open to the referee on the evidence. There was evidence either way. In particular, there was evidence to support the conclusions to which he came. It should be noted that the referee considered all the evidence. There were aspects of the evidence given by the experts called by the Owners Corporation with which the referee did not agree. His consideration of the evidence, as demonstrated in the report, shows a careful and analytical approach, and not merely an unreasoned and unreasonable acceptance of the case for one party over the case for another.

There was much debate, both before the referee and before me, as to whether the risk of failure of the timber hobs, and what the referee found were the risks inherent in the limited scope of rectification propounded by the Guarantee Corporation, justified the demolition of the hobs and their replacement by hobs complying with the relevant requirements of the specification. That debate was conducted by reference to a line of authority commencing with the decision of the High Court of Australia in Bellgrove v Eldridge (1954) 90 CLR 613. In that case, work carried out by a builder for a proprietor departed substantially from the specifications. As a result, the foundations were defective and the building was unstable. The trial judge held that the proprietor was entitled to damages assessed as the cost of demolishing the building and constructing a new building in accordance with the contract and the specifications. The High Court (Dixon CJ, Webb and Taylor JJ) upheld the decision of the trial judge.

Their Honours said at 617 that a proprietor who contracts with a builder is entitled to have a building erected in accordance with the contract, the plans and the specifications. Where what is erected does not comply with the plans and specifications, the proprietor suffers loss. That loss is not to be measured by comparing the value of that which has been erected with the value of that which should have been erected. Prima facie, the loss is the cost of rectification of the defects.

Their Honours said at 618 that there was a two-fold qualification to the prima facie measure of damages. Firstly, the rectification work must be necessary to produce conformity with the contract, the plans and the specifications. Secondly, in all the circumstances, it must be reasonable to carry out that work.

Their Honours said at 619 that it was a question of fact in each case as to what remedial work would be both necessary and reasonable.

At 620, their Honours considered the alternative and limited scope of work propounded by the appellants. They said, adopting the conclusion of the trial judge, that that work would provide at best a doubtful remedy. They said that to give the respondent damages calculated by reference to that limited scope of work “could not in any sense be regarded as ensuring to her the equivalent of a substantial performance by the appellant of his contractual obligations”.

An example of the application of the qualification as to reasonableness is to be found in the decision of the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344. The plaintiffs contracted to build for the defendant a swimming pool and its enclosure. The contract specified that the pool should have a diving area seven feet six inches deep. The pool as constructed was only six feet deep in that area. It was, however, perfectly safe to dive into, and there was no evidence that the shortfall in depth had decreased the value of the pool. Their Lordships held that the defendant was not entitled, by way of damages, to the estimated cost of demolishing and rebuilding the pool to the specified depth, because it would not be reasonable to do so.

Their Lordships considered a number of authorities, including the decision in Bellgrove . See for example Lord Jauncey of Tullichettle (with whom Lord Keith of Kinkel, Lord Bridge of Harwich and Lord Mustill agreed) at 357; and Lord Lloyd of Berwick (with whom also Lord Keith, Lord Bridge and Lord Mustill agreed) at 367, 378.

Their Lordships pointed out that the function of damages for breach of contract was to put the plaintiff, so far as money could, in the same position as if the contract had been performed: the well known statement of Parke B in Robinson v Harman (1848) 1 Exch 850 at 855. That was the justification for the principle adopted in Bellgrove . It was also the reason for the qualification. As Lord Jauncey said at 357: If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate. A failure to achieve the precise contractual objective does not necessarily result in the loss which is occasioned by a total failure.

As his Lordship pointed out, that is consistent with the reasoning of the High Court in Bellgrove at 618 (see at [123]) above.

Lord Lloyd also took as his starting point the statement of Parke B in Robinson : see at 365. Having referred to a number of authorities, including the decision in Bellgrove , Lord Lloyd said at 368 that the concept of reasonableness is of central importance in selecting the appropriate measure of damages: If reinstatement is not the reasonable way of dealing with the situation, then diminution in value, if any, is the true measure of the plaintiff’s loss. If there is no diminution in value, the plaintiff has suffered no loss. His damages will be nominal.

In the result, as I have said, their Lordships held that the defendant was not entitled to the cost of demolition and reconstruction.

A contrary result was reached in the case of Kirkby v Coote [2006] QCA 61. That case concerned a “pole house”. The house was supported by ten wooden poles and forty steel posts. In heavy rain, the footings under eleven of those poles or posts subsided, causing substantial damage to the house. The trial judge found that the design of the footings was negligent, because it did not comply with the recommendation of a geologist that the footings be founded on “dense basalt or … interlocking boulders”. Five of the failed footings were excavated. None of them was so founded.

The defendants conceded that if the eleven failed footings had been founded on rock, they would not have failed. The question for decision was whether the other footings were performing, and would continue to perform, in a satisfactory way; or whether there remained the risk of movement. The defendants contended that the only rectification required was the reasonable cost of underpinning the house where the footings had failed. The plaintiffs claimed that they were entitled to the reasonable cost of demolishing and rebuilding the house with footings that conformed to the geologist’s recommendation.

The trial judge awarded as damages the cost of demolition and reconstruction. He did so because the lesser scope of remedial works proposed by the defendants would leave the plaintiffs with an unacceptable continuing risk of structural failure. His decision was upheld by the Court of Appeal.

Keane JA, with whom Williams JA agreed, referred at [39] to the contention of the appellants (defendants) that the 39 footings which did not fail during the downpour had not exhibited any sign of failure since the house was constructed in 1994. They submitted, as his Honour recorded, that “a possibility that the footings are not down to rock, in the presence of satisfactory performance over a long period of time, is not evidence of a defect giving rise to a risk of failure”.

It was correct to characterise as a possibility that the footings might not be founded on rock. That was because the investigations related to five only of the failed footings, out of the total of fifty footings in all.

Keane JA said at [50] that on the findings of the trial judge, “the threat to the stability of the building may not be “grave” in the sense of obvious and immediate, but it is real.” His Honour referred at [51] to the further finding of the trial judge “that partial underpinning would be a doubtful remedy, in the sense that it would be unlikely to remove the threat to the stability of the building posed by the footings, even though they have not yet failed”.

At [58] Keane JA, having referred to the decision in Ruxley , said that it could be distinguished. The present case was not one where the breach of duty resulted only in aesthetic disappointment. The plaintiffs had not been given a “perfectly serviceable” house: “one which is effectively free of risk of slipping”. Thus, his Honour said at [59], the plaintiffs “should recover the amount of damages necessary to enable them to own a house free of risk so far as its stability was concerned”.

On the referee’s findings, the developer received less than the builder was obliged to deliver. As between the developer and the builder, the prima facie measure of damages for that breach of contract is the cost of rectification. Again on the referee’s findings, rectification requires the demolition of the timber hobs and their replacement by concrete or brick hobs complying with the specification. By analogy with Kirkby , it would be wrong to require the builder to bear the cost of demolition and reconstruction only if in all the circumstances that work were unreasonable.

On the referee’s findings, it would not be unreasonable, as between the developer and the builder, to require the builder to bear that cost. That is because the hobs as designed were intended to form an effective part of the waterproofing system, and as constructed they did not. The developer was entitled to receive a finished building in which the hobs could play their part, in helping to waterproof the internal areas of lots, for the life of the building.

Damages for breach of contract are assessed “once and for all”. As Keane JA pointed out in Kirkby at [59], this means that the court should ensure that the damages awarded accurately reflect the cost of restoring the innocent party to the position it would have enjoyed had the guilty party not breached its contract.

On that analysis, the position is no different as between the Owners Corporation and the Guarantee Corporation (or, for that matter, between the Owners Corporation and HIH had that company not succumbed to years of poor underwriting judgments and inadequate provisioning). Demolition and replacement of the hobs are reasonable steps to take and the cost of doing so is the measure of damages. That is so whether damages are assessed in contract or in tort.

The question, as between the developer and builder, was whether the developer or the builder should bear the risk that the hobs would prove inadequate for their intended part in the waterproofing system. The question can be no different as between the Owners Corporation and the Guarantee Corporation. The referee answered that question in favour of the Owners Corporation. He concluded that it was reasonable that the hobs should be demolished and replaced. As I have said already, that conclusion was open to him on the evidence, and the means by which he reached it betrays no error of a kind that might require rejection of this aspect of the report.

Further, that position can be sustained by s 18C (and s 18D) of the HB Act. The effect of the sections is to give successors in title the benefit of the statutory warranties. That cannot be done if the successor’s entitlement to damages for breach of a warranty is anything other than the appropriate contractual measure.

It follows that the report, insofar as it deals with the defect in and replacement of the timber hobs, should be adopted. The dispute in relation to tiling

As I have said, the balconies of the affected lots were tiled. The tiles were laid over the waterproofing membrane. It was common ground that removal and replacement of the hobs would require the removal, and probable destruction, of at least some of the tiles on the balconies. It was also common ground that replacement of those tiles with matching tiles was impracticable.

A number of different solutions was propounded. The Owners Corporation said that all the tiles in all the balconies of the affected lots should be removed and replaced. The Guarantee Corporation said that the limited number of tiles that required removal could be replaced with tiles of a contrasting but compatible colour and shape. Alternatively, the Guarantee Corporation said, the tiles could be removed from a limited number of balconies; those balconies could be retiled completely; and the stock of tiles thereby yielded could be utilised to replace tiles that were damaged in the course of replacing the hobs. The referee’s reasoning

The referee considered the question of the extent of tile replacement at R286 to 298. The heart of his reasoning is found at R295. He said there that “the complete removal and replacement of a number of balconies so as to provide a stock of the original tiles seems to me a reasonable and economic way of proceeding with this aspect of the work”. He referred to the evidence of Professor Marosszeky and Mr Palmer in support of this. The evidence in question includes that of Professor Marosszeky referred to at R167. In that evidence, Professor Marosszeky said that it would be possible to lift all the tiles off the balconies of lots 401 and 112, “which are the very bad ones” and to use those as a stock for replacing damaged tiles on other balconies. However, that evidence was not directed to the situation of removal and replacement of all the timber hobs. It was, and remained, Professor Marosszeky’s view that the wholesale replacement of the timber hobs was not required. Professor Marosszeky was addressing his view that all that was required was the removal of one tile at each end of the hob. That was the work which, in Professor Marosszeky’s opinion, was necessary to enable the absence of lapping or flashing at the points where the hobs abutted the dividing walls to be rectified.

The referee determined the amount to be allowed by stating (R297) “it seems that it is reasonable to allow for removal and replacement of 30% of the area as being referrable to the consequential rectification works”. He noted at R298 that the experts had agreed on the costs for removal and replacement of all tiles. Thus, he allowed 30% of the cost so agreed. The parties’ submissions

Mr Neal submitted that: (1) the referee had erred in using the evidence of Professor Marosszeky, given in a particular context and for a particular purpose, in a different context and for a different purpose; (2) the referee had overlooked the unchallenged evidence of Mr McMillan, an expert called by the Owners Corporation, to the effect that all tiles on all effected balconies should be replaced; (3) the referee had denied natural justice to the Owners Corporation in his approach to this issue; and (4) there was no evidence to support the referee’s quantification of the amount to be allowed.

Mr Neal submitted that the denial of natural justice occurred because the referee had stated, during the oral evidence in chief of Mr McMillan and in relation to Mr McMillan’s evidence that all the tiles in all the affected balconies would need to be replaced, that it was “just logical” and that there was no need “to have expert evidence to say when you do a big job you will have trouble getting tiles”. On that basis, the referee stopped the further examination in chief of Mr McMillan on this point, but reserved to Mr Neal the right to re-examine.

As Mr Neal pointed out, Mr McMillan was not cross-examined on this aspect of his evidence. There was thus no occasion to re-examine on it.

Further, Mr Neal submitted, the submissions put by the Guarantee Corporation to the referee did not challenge this aspect of Mr McMillan’s evidence. In this context, he submitted, the written submissions given by the Owners Corporation to the referee referred expressly to this “unchallenged evidence” of Mr McMillan. The written submissions that the Guarantee Corporation gave to the referee did not deal with the point expressly. The highest that those submissions rose was to note that the dispute was whether “the scope of works required removal and replacement of timber hobs with concrete and removal and replacement of all balcony tiles because the timber hob is not fit for purpose and balcony tiles cannot reasonable [sic] be matched” (emphasis in the original). Mr Neal submitted that this paragraph could scarcely be thought to have been sufficient to signify to the referee a real dispute as to Mr McMillan’s “unchallenged evidence”, or that the Guarantee Corporation was advocating instead a much more limited scope of works, in relation to tiling, based on Professor Marosszeky’s views stated for different purposes in a different context.

Mr Lynch submitted that the written submissions for the Guarantee Corporation had been sufficient to flag the existence of a dispute. He accepted that the submissions did not point the referee towards the conflicting evidence (let alone, to evidence that might undermine the proposition advanced by the Owners Corporation that Mr McMillan’s oral evidence on this point was “unchallenged”). Otherwise, he relied on the referee’s reasons. Decision

In his first report, Mr McMillan had suggested that it was necessary to remove and replace only one row of tiles on each affected balcony. However, as he explained in his oral evidence in chief, that view had changed. To understand what follows, I set out the entire passage of this exchange before the referee (T84.26-85.22) Q. The view that you have expressed in the liability conclave is that, assuming that the hobs are replaced, there will be a need to replace all of the tiling on the balconies; is that right? A. That is correct Q. Can you explain to the referee the reason why you express the opinion that you do now in relation to the tiling? A. The basic reason is trying to match old tiles with new tiles. The more units you are doing, the harder that becomes to get a match throughout. You just can’t buy a uniform batch of tiles and insert them because they are just not going to match. When 502 was done, the contractor who did that work took it upon himself to take the owner of that particular unit around town to source tiles that were -- MR JOSEPH: I object to this. MR NEAL: He is going to be giving evidence. MR JOSEPH: Let him give the evidence. THE REFEREE: I will not allow any more of it. I think in one of the reports there was a reference, it was possibly one of the other units, there was a suggestion they had to be carefully set aside and were not used because of the paucity of supply. It is in one of them. MR JOSEPH: One of our experts. THE REFEREE: I would have through that is just logical. I don’t know that you have to have expert evidence to say when you do a big job you will have trouble getting tiles. People who want contractual perfection, which is what Belgrove v Eldridge basically says, you can’t just change one tile, you have to change quite a few, and that is what I think the issue is when we get to some of the disputes on quantum. Anyway, no more questions on this issue, you can re-examine if it arises. I am not sure how it will. MR NEAL: I don’t think it will arise now, thank you. I have nothing further.

I note that Mr Joseph of Senior Counsel appeared with Mr O’Keefe of counsel before the referee for the Guarantee Corporation.

In my view, it was reasonable to infer from the referee’s ruling, that he would permit “no more questions on this issue”, that his interim or tentative view was that if he were to conclude that the timber hobs should be replaced by concrete hobs, then it would follow that all the tiles in the balconies of the effective lots would need to be replaced.

Of course, a referee who forms an interim or tentative view is no more bound to adhere to it, at the conclusion of all of the evidence and all of the submissions, than a judge in the same position. But where a judge proposes to change an interim or tentative view that has been intimated to the parties, natural justice requires that she or he inform the parties of this and give them an opportunity to address the situation. That is so a fortiori where, on the basis of that view, the judge has halted otherwise relevant evidence. No different principle should apply to a referee.

In this case, that evidence of Mr McMillan rested as his last expression of opinion on the point. Professor Marosszeky and Mr Martin continued to hold a different opinion, as the referee pointed out at R289. The referee there referred to a joint report produced by all the experts following a conclave, in the course of which Professor Marosszeky and Mr Palmer said: Should it be determined by the court that the timber hobs need replacing, experts Palmer and Marosszeky contend that it is sufficient to remove and replace a single row of tiles adjacent to the hob to permit all works to be completed, it is their opinion that it is feasible to connect to the existing membrane using appropriate priming systems and if necessary a contrasting row of edge tiles can be used to produce an aesthetically pleasing result.

The referee referred at R291 to Mr McMillan’s original view, that not all the tiles would need to be removed and replaced. He did not refer to Mr McMillan’s changed view, as given in his oral evidence in chief. Nor did the referee refer to his own interim or tentative view that what Mr McMillan there said was “just logical”.

It appears that the referee did not accept the view of Professor Marosszeky and Mr Palmer that if all the timber hobs needed replacing, removal of one row of tiles only would be required. The referee said at R293 that “[i]t will be necessary when carrying out the rectification work to the hobs to remove an uncertain area of tiles…”. He said at R294 that “[t]he precise area which will be involved in this consequential remedial work is unknown”. He said, however, at R295 and 296 that the removal and replacement of all tiles was justified only by an “aesthetic consideration” or for reasons of “maintenance and preservation”.

In my view, if the referee were going to revisit what appeared to have been settled at an early stage of the hearing before him (namely, the oral evidence of Mr McMillan that if the hobs were to be replaced then all the tiles on all the affected balconies would need to be replaced), it was incumbent on him to give the parties – in particular, the Owners Corporation – an opportunity to address on this. In truth, I think, what happened is that the referee overlooked what he had said when he stopped this aspect of Mr McMillan’s evidence, and overlooked also that on the written submissions there was no real dispute as to what Mr McMillan had said. The real dispute was, as it had always been, whether removal and replacement of the timber hobs was necessary.

Thus, I think, this aspect of the report should not be adopted.

I am also concerned at the referee’s approach to quantification. Neither party took me to any evidence which supported the referee’s estimate based on removal and replacement of 30% of the total area of tiles involved. Nor does this appear to have been suggested, as a methodology, by either party in submissions. This causes a number of problems: (1) the referee’s approach to quantification does not appear to be supported by the evidence; (2) on the contrary, it could be said to be inconsistent with his finding at R 294 (see [161] above); (3) the report does not indicate an appropriately reasoned path to the conclusion reached; and (4) the parties do not appear to have been given an opportunity to address on the approach to quantification adopted by the referee.

The amounts involved are relatively substantial. The referee allowed some $35,500.00. The total claimed, as agreed, appears to have been about $118,000.00.

Mr Neal submitted that, if I were to come to the conclusions that I have just expressed, I should not send the matter back to the referee, but should decide it myself. Mr Lynch submitted that if, contrary to his primary submission, it had not been open to the referee to come to the conclusion that he did reach, without denying natural justice to the Owners Corporation, then the question would have to go back to the referee.

With some reluctance (because of the cost involved) I think that the question will have to be remitted to the referee for further consideration and further report. It is apparent from the relevant paragraphs of the report that the evidence capable of bearing on the extent of work required, and therefore on the cost, is more than the few passages to which I have been referred. It is also apparent from the report that the referee’s consideration of the relevant evidence may well require him to consider the context in which each piece of evidence was given, and the purposes or ends to which it was addressed.

I accept that there has been no attack made on the credibility of the relevant witnesses. Nonetheless, I think, the referee is in a far better position than I am to assimilate all the relevant evidence on the point (with the assistance of further submissions from the parties if he thinks it necessary or desirable) and to reconsider the issue. Conclusion and orders

For the reasons given at [8] to [79] above, the Guarantee Corporation’s notice of motion for leave to amend should be dismissed with costs.

The report should be varied in accordance with what I have said at [86] and [87] above. The relevant sections of the report, so varied, should be adopted.

The report should be adopted insofar as it deals with the defective nature of and replacement of the timber hobs, and the extent and cost of the necessary rectification.

The question of the extent of tiling work required, and the amount to be allowed for that work, in consequence of the rectification of the timber hobs, should be remitted to the referee for further consideration and report. That exercise should be undertaken by reference to the evidence already given and submissions made, although the referee may, if he wishes, call for further submissions from the parties, limited to drawing the referee’s attention to the relevant evidence on the topic and the inferences to be drawn from that evidence.

I propose not to make orders in relation to the variation and adoption of the report until the referee’s further report has been received, and the question of its adoption (if there is a contest) has been debated. Thus, the orders that I make are: (1) Order that the defendant’s notice of motion filed on 5 March 2008 be dismissed. (2) Order the defendant to pay the plaintiff’s costs of that notice of motion. (3) Remit to the referee for further consideration and further report the following questions: (a) what is the extent of tiling and associated remedial work that will be required by reason of the demolition of timber hobs and their replacement with properly constructed concrete hobs? (b) what is the cost to be allowed (including GST and any proper allowance for escalation) for that tiling and associated remedial work? (4) Direct that in considering and reporting upon the remitted questions the referee is to consider only: (a) his report dated 25 June 2008, to the extent that it touches on those questions; (b) so much of the evidence given in the reference as is relevant to those questions; (c) so much of the submissions already made by the parties in the reference as is relevant to those questions; (d) such further submissions (if any) as the referee requires or permits the parties to make in relation to those questions; and (e) these reasons. (5) Direct that, without the leave of the Court, no party shall put to the referee, in any further submissions required or permitted by the referee, any argument of fact or law that has not been raised by that party in its earlier submissions; and that, in general, such further submissions should be limited to identifying the evidence given in the reference that is relevant to the remitted questions and the submissions already made in the reference touching on those remitted questions. (6) Direct the referee to furnish his further report to the Court, in respect of the remitted questions by 14 November 2008. (7) List matter before me for directions at 9:30am on 21 November 2008. (8) Reserve liberty to apply on 3 days’ notice. (9) Subject to order (2), reserve for further consideration the costs of the reference and the costs of the proceedings to date.