The Owners – Strata Plan 89041 v Galyan Pty Ltd

1. [1]

   The plaintiff is the Owners Corporation in respect of a property comprising 14 residential units at Ettalong.

2. [2]

   The first defendant, Galyan Pty Ltd, was the owner and developer of the property. The second defendant, ACH Clifford Pty Ltd, was the builder. I will refer to the defendants, together, as “the Builder”.

3. [3]

   The Owners Corporation commenced these proceedings on 20 August 2015 in the NSW Civil and Administrative Tribunal (NCAT). The proceedings were transferred to this Court on or about 8 March 2016.

4. [4]

   The matter was set down for hearing before Hammerschlag J commencing on 11 September 2017. On the second day of the hearing, the proceedings were settled on the basis of the parties agreeing to appoint Ms Janet Grey as referee.

5. [5]

   By Heads of Agreement made on or about that date the parties agreed:

6. [6]

   On 12 September 2017 Hammerschlag J said, in relation to the question of costs:

7. [7]

   Ms Grey published her report on 18 February 2019. Ms Grey awarded the Owners Corporation $1,282,486.59.

8. [8]

   On 22 February 2019, by consent, Hammerschlag J made the following orders:

9. [9]

   The matter that now divides the parties is what orders should be made as to the costs of the proceedings, including the reference.

10. [10]

    By the Heads of Agreement, the parties agreed that that question be determined in the manner described by Hammerschlag J on 12 September 2017. Thus the question is whether the Owners Corporation’s refusal to allow the Builder back in to the site to remedy the defects, prior to the date of Hammerschlag J’s order, was unreasonable.

Preliminary points

1. [11]

   Mr Rudge SC, who appeared with Mr Freeman for the Builder, sought to raise two preliminary points.

2. [12]

   The first was that a determination on costs at this point is premature because:

3. [13]

   I do not accept this submission. The parties’ agreement is that the only matter to be determined in relation to costs is that stated by Hammerschlag J on 12 September 2017; that is whether the Owners Corporation’s refusal “previously” to allow the Builder back onto the site to carry on work was unreasonable.

4. [14]

   The manner in which the defects in the building are remedied from now on is not relevant to that question.

5. [15]

   The second point that Mr Rudge sought to make was that the reasonableness of the Owners Corporation’s conduct, vis-à-vis allowing the Builder back on site, is now “foreclosed” because:

6. [16]

   But this is not correct. The parties did not agree that the Builder should be permitted to return to the site to effect remediation. They agreed that a “Remedial Builder” should, adopting the words in the Heads of Agreement, “undertake all defects rectification, including all necessary variations required to be undertaken to properly rectify the defects the subject of the Provisional Verdict”.

7. [17]

   The Builder agreed to pay all costs associated with the appointment of the Remedial Builder. But the work is to be undertaken by the Remedial Builder, and not by the Builder.

8. [18]

   Further, by the Heads of Agreement, the parties agreed that the Builder engage a superintendent to “superintend and certify the works” and that “the Remedial Builder…strictly follow all directions of the superintendent”. Originally, that superintendent was to be nominated by Mr Grey. Later, the parties agreed that the Builder nominate the superintendent. Nonetheless, the Remedial Builder was to act as directed by the superintendent; not the Builder.

9. [19]

   I see nothing in these circumstances as “foreclosing” the question of the reasonableness of the Owners Corporation’s conduct.

Did the Owners Corporation act unreasonably?

1. [20]

   The effect of the parties’ agreement in the Heads of Agreement is that the only issue that arises in relation to costs is whether, prior to 12 September 2017, the Owners Corporation acted unreasonably in refusing to allow the Builder back on site to rectify the defects.

2. [21]

   The relevant principles were summarised in the submissions of Mr Corsaro SC and Mr Jedrzejczyk, who appeared for the Owners Corporation, as follows:

3. [22]

   Mr Rudge did not dispute the accuracy of this summary.

The course of events

1. [23]

   The strata plan was registered on 26 November 2013.

2. [24]

   Lot owners noticed defects in the building as early as February 2014.

3. [25]

   The Owners Corporation engaged a licensed builder, Mr Rohan Coleman, to prepare a report in relation to the defects. Mr Coleman’s report was to hand on 28 April 2014.

4. [26]

   At an Extraordinary General Meeting on 2 August 2014, the lot owners resolved to adopt Mr Coleman’s report and to refer the matter to NSW Fair Trading because of “numerous attempts” by individual owners to have defect works rectified.

5. [27]

   On 19 November 2014 the Owners Corporation lodged a submission with the NSW Department of Fair Trading concerning the building defects.

6. [28]

   On 15 December 2014 a “Joint Inspection” of the building was carried out by Mr Coleman and Mr John Worthington, an independent expert representing the Builder. Mr Coleman and Mr Worthington prepared a “Joint Report” setting out the defects they identified.

7. [29]

   The parties agreed that Mr Michael Lebrocque, evidently a sub-contractor to the Builder, would “carry out the works as listed in the Joint Report”, that the Builder would pay for that work, and that Mr Coleman would supervise the work.

8. [30]

   Mr Lebrocque commenced work at the site in late January or early February 2015 and carried out defect rectification work until August 2015.

9. [31]

   On 3 March 2015, Mr Steve Masters, a Building Inspector from the Department of Fair Trading, inspected the site.

10. [32]

    On 9 April 2015 Mr Masters issued a Rectification Order requiring that 30 identified items of “Defective Work” be rectified by 8 May 2015.

11. [33]

    On 12 May 2015 Mr Masters published a Building Inspection Report in which he reported that 19 of the 30 items identified in his 9 April 2015 Rectification Order had not been rectified.

12. [34]

    Mr Masters recorded:

13. [35]

    On 27 July 2015 the lot owners resolved that:

14. [36]

    On 11 August 2015 the Owners Corporation’s strata title manager, Ms Jill Walshaw, wrote to the Builder “to notify you of further defects found within the complex and to seek clarification of the current rectification work”. Ms Walshaw attached “three separate lists of defects” and continued:

15. [37]

    The Builder responded to Ms Walshaw’s letter on 20 August 2015 (two days after the deadline specified in Ms Walshaw’s email) stating:

16. [38]

    In the meantime, on 19 August 2015, the Owners Corporation resolved to engage lawyers in respect of the building defects.

17. [39]

    Mr Rudge asked Ms Gail Woodley-Page, the secretary of the Executive Committee of the Owners Corporation and the owner of two lots in the development, about this:

18. [40]

    Ms Woodley-Page said that she understood that “with minor defects, you were given two years to take legal action to get them rectified”.

19. [41]

    Accordingly, these proceedings were commenced in NCAT on 20 August 2015.

20. [42]

    Mr Lebrocque was excluded from the site at around this time and the Builder has not since been permitted to return to the site to continue to rectify the outstanding defects.

21. [43]

    The question is whether the Builder has established that it was unreasonable for the Owners Corporation to maintain this stance.

22. [44]

    The Owners Corporation made clear that it was only prepared to allow the Builder back on site to rectify the defects if a scope of works could be agreed.

23. [45]

    On 6 October 2016, at the first directions hearing at NCAT, the Tribunal noted:

24. [46]

    On 12 October 2015 the Builder’s solicitor wrote to the Owners Corporation’s solicitor:

25. [47]

    On 12 October 2015 the Owners Corporation’s solicitor wrote to the Builder’s solicitor:

26. [48]

    On 29 October 2015 the Builder’s solicitors replied to the Owners Corporation’s solicitor:

27. [49]

    The Owners Corporation’s solicitor replied on the same day stating:

28. [50]

    The Owners Corporation’s solicitor’s letter continued, addressing the matters set out at [48] above:

29. [51]

    On 4 November 2015 the Owners Corporation’s solicitor wrote to the Builder’s solicitor stating that “due to some administrative issues with getting instructions from our client” the Owners Corporation’s “expert evidence on liability will be delayed by approximately 4 weeks”.

30. [52]

    That prompted this response from the Builder’s solicitor:

31. [53]

    The following year, on 2 February 2016, the Builder’s solicitor withdrew the offer that the Builder had made to NCAT on 6 October 2015. He said:

32. [54]

    A short time later, on or about 8 March 2016, the proceedings were transferred from NCAT to this Court.

33. [55]

    On 31 August 2016 the Builder’s solicitor wrote to the Owners Corporation’s solicitor complaining that the Owners Corporation had not adequately particularised its claim. The solicitor continued:

34. [56]

    On 23 September 2016 the Builder’s solicitor wrote to the Owners Corporation’s solicitor:

35. [57]

    The Owners Corporation’s solicitor replied on 28 September 2016:

36. [58]

    The Builder’s solicitor replied the same day stating, amongst other things:

37. [59]

    In the same letter the solicitor referred to “the wasted costs in dealing with spurious claims”.

38. [60]

    On 28 September 2016 the Owners Corporation’s solicitor wrote to the Builder’s solicitor:

39. [61]

    The following day the Owners Corporation’s solicitor wrote to the Builder’s solicitor:

40. [62]

    The Builder’s solicitor replied the next day stating that those two matters were “noted”.

41. [63]

    The issue of a scope of works was not addressed in subsequent correspondence between the parties.

42. [64]

    What was repeated was the Builder’s assertion that the Owners Corporation was making “bogus claims”. Thus, on 8 November 2016, he wrote:

43. [65]

    This correspondence justifies, in my opinion, the submission made by Mr Corsaro and Mr Jedrzejczyk on behalf of the Owners Corporation that following the Builder’s open offer of 6 October 2015, “no scope of works responsive to the open offer was ever provided to the Owners Corporation by the defendants”. Indeed, the open offer was formally withdrawn on 2 February 2016 (see [53] above) and not repeated.

44. [66]

    On or about 6 January 2017 the Builder served a report prepared by Mr Mark Seeto, from QS Building Economics Pty Ltd, entitled “Estimate of the Cost to Rectify Defects”.

45. [67]

    Mr Seeto expressed an opinion about the need to carry out each item of work specified in the Owners Corporation’s Scott Schedule.

46. [68]

    The total of the amount claimed by the Owners Corporation, including GST but excluding interest was $2,668,223. Mr Seeto concluded that work to the value of $318,078.06 was required.

47. [69]

    Mr Seeto’s report represented, in effect, the Builder’s second offer to rectify the defects in the building.

48. [70]

    Mr Corsaro and Mr Jedrzejczyk produced a schedule setting out the 174 defects complained of by the Owners Corporation and depicting, by use of colours, the outcome before Ms Grey compared to Mr Seeto’s opinion.

49. [71]

    I attach that schedule (Defect Analysis Document MFI 3 (454 KB, pdf)).

50. [72]

    Column 3 identifies the alleged defects that Mr Seeto accepted were the Builder’s responsibility by the colour green and defects that Mr Seeto did not accept were the Builder’s responsibility by the colour red.

51. [73]

    Column 4 identifies Ms Grey’s conclusions. The items coloured blue are those Ms Grey found to be the Builder’s responsibility.

52. [74]

    As the schedule vividly depicts, Ms Grey upheld the Owners Corporation’s claims in respect of almost all of the defects that Mr Seeto rejected as not being the Builder’s responsibility.

53. [75]

    As Mr Corsaro and Mr Jedrzejczyk submitted, that analysis demonstrates that “the offer to rectify contained in [Mr Seeto’s] report was not reasonably capable of being accepted, or alternatively, that the [Owners Corporation] did not act unreasonably in rejecting that offer”.

54. [76]

    Thereafter, as a result of expert conclaves, the ambit of the dispute between the parties was reduced. By the time the matter was referred to Ms Grey, the amount claimed by the Owners Corporation had reduced from the figure referred to by Mr Seeto, $2,668,223 to $1,442,841.25.

55. [77]

    Ms Grey awarded the Owners Corporation $1,282,486.59 exclusive of GST. Thus, the Owners Corporation was, in monetary terms, substantially successful before Ms Grey in relation to those matters which then remained in dispute.

Did the Owners Corporation reasonably lose confidence in the Builder’s ability to do the rectification work?

1. [78]

   As I have set out above, a factor relevant to whether the Owners Corporation acted reasonably is whether the Owners Corporation reasonably lost confidence in the willingness and ability of the Builder to do the rectification work: see Di Blasio at [45].

2. [79]

   In her affidavit of 11 May 2017 the chairperson of the Executive Committee of the Owners Corporation, Ms Feehely, concluded by saying that, for the reasons set out in detail in her affidavit:

3. [80]

   Ms Woodley-Page expressed a similar opinion in her affidavit.

4. [81]

   Ms Feehely and Ms Woodley-Page gave these reasons for having lost confidence in the Builder’s ability or willingness to carry out the works:

5. [82]

   Mr Rudge cross-examined each of Ms Feehely and Ms Woodley-Page but did not challenge the evidence they gave about these matters. I accept Ms Feehely’s and Ms Woodley-Page’s evidence. They were the chairperson and secretary, respectively, of the Executive Committee of the Owners Corporation and accept that their loss of confidence in the Builder is reflective of the loss of confidence of the Owners Corporation generally.

Conclusion

1. [83]

   The question is whether the Builder has shown that, as at the date of Hammerschlag J’s observations set out at [6], it was unreasonable of the Owners Corporation not to allow the Builder back on site to rectify the defects to the building.

2. [84]

   The enquiry is directed to the Owners Corporations conduct prior to 12 September 2017: hence his Honour’s use of the word “previously” in that passage.

3. [85]

   Unless the Builder can establish that matter, it must follow from the parties’ agreement, as set out at [5(f)] above, that the Builder pay the Owners Corporation’s costs.

4. [86]

   I am not satisfied that the Builder has shown that prior to 12 September 2017 the Owners Corporation acted unreasonably in not allowing the Builder to return to the site after August 2015.

5. [87]

   Between the time of the Builder’s exclusion from the site in August 2015 and September 2017 the Builder did not propose a workable scope of works.

6. [88]

   Further, through its solicitor, the Builder adopted an unnecessarily aggressive approach to the Owners Corporation (describing their claims as including “bogus” and “frivolous” elements).

7. [89]

   The rectification work ultimately proposed on the Builder’s behalf by Mr Seeto fell far short of that which Ms Grey has now determined was needed. This points strongly to the conclusion that it was reasonable for the Owners Corporation not to permit the Builder to rectify the work on the basis proposed by Mr Seeto.

8. [90]

   It also confirms my conclusion that the Builder has not discharged its onus of showing that, as at 12 September 2017, the Owners Corporation had acted unreasonably in not permitting it to return.

9. [91]

   Accordingly I propose to make a costs order in favour of the Owners Corporation.

10. [92]

    I invite the parties to confer and agree on the precise order that should be made.