The Owners - Strata Plan No. 81376 v Dyldam Developments Pty Ltd

1. [1]

   The plaintiff (the “Owners Corporation”) is the owners corporation in respect of a 98 unit strata development in Parklea (the “Development”).

2. [2]

   The first defendant, Dyldam Developments Pty Ltd (the “Builder”) built the Development on land then owned by the second defendant, Amaline Properties Pty Ltd (the “Developer”). There was, presumably, a building contract (the “Building Contract”) between the Builder and the Developer. It is not in evidence. It may have been oral. Both companies went into administration in 2022. The Builder is now subject to a deed of company arrangement. The Developer is in liquidation.

3. [3]

   The only active party is the third defendant, Insurance Australia Limited trading as Lumley Australia (“the Insurer”).

4. [4]

   On 29 March 2023, Darke J ordered that the Insurer be joined as third defendant on the basis that the date on which such joinder take effect “be determined at trial”.

5. [5]

   On 6 October 2006, a predecessor to the Insurer issued a Residential Building Insurance Policy (the “Policy”) in respect of the Development.

6. [6]

   The Owners Corporation has purported to make claims under the Policy in respect of allegedly defective works in the Development. The Insurer accepts, for present purposes, that the Development is affected by such defects. I was informed that the claim the Owners Corporation would seek to make out is in the order of $13 million.

7. [7]

   I am answering separate questions ordered on 24 June 2024 by Ball J [1] directed principally to the question of whether the claims under the Policy are out of time.

8. [8]

   The Insurer accepts that, if any of the claims have been made within time, the Policy responds.

9. [9]

   The separate questions [2] are whether:

10. [10]

    For the reasons that follow, the answer to each question is “no”.

The course of events

1. [11]

   On 4 September 2008, a certifier, Mr Lyall Dix issued a document called “Occupation Certificate” (the “Certificate”) in respect to the Development purportedly pursuant to ss 109C(1)(c) and 109H of the Environmental Planning and Assessment Act 1979 (the “EPA Act”). [3] There is an issue as to the effectiveness of the Certificate.

2. [12]

   The relevant strata scheme was registered on 4 November 2008. The 98 units in the Development have been occupied continuously since then.

3. [13]

   The Owners Corporation commenced these proceedings in 2013 against the Builder and the Developer. The Owners Corporation alleged that, in breach of the statutory warranties implied in the Building Contract by s 18B of the Home Building Act 1989 (the “HBA”) (the “Statutory Warranties”), there were defects in the common property.

4. [14]

   The Owners Corporation’s claim was later amended to include further claims for breach of settlement agreements made on 25 July 2017 between the Owners Corporation, the Builder, and the Developer (the “First Settlement”) and on 11 June 2021 between the Owners Corporation and the Builder, but not the Developer (together, the “Settlement Agreements”).

5. [15]

   The Settlement Agreements obliged the Builder to complete identified rectification work. The Owners Corporation contends that the Builder did not complete all of that rectification work and that some of the rectification work that was done was defective. The Builder last attended the Development to carry out work under the Settlement Agreements on 20 December 2021.

The Policy

1. [16]

   The Policy contained many defined terms, denoted, in the usual way, by the use of capital letters; for example “Insured Event”. I will refer only to the wording of the definitions where necessary.

2. [17]

   “Cover” was provided in Section 1.1:

3. [18]

   “Insured Loss” was defined to mean:

4. [19]

   “Insured Event” was defined to mean:

5. [20]

   Section 4.1 dealt with the Period of Insurance and provided relevantly:

6. [21]

   Although the Policy contained a definition of “‘Completion’ of the Work”, as I discuss below, the date of completion for the purposes of the Policy is to be determined by s 3C of the HBA, [4] which provides for when “completion of residential building work” of a new building in a strata scheme occurs. Thus, the parties’ submissions as to when the “work insured” focused on that section and its implications so far as concerns the Certificate.

7. [22]

   Section 2.1 provided for indemnification for an “Insured Loss” arising from:

8. [23]

   Section 2.3 provided:

9. [24]

   Section 3.1 provided:

10. [25]

    Section 8.7 provided:

11. [26]

    The insuring clause in the Policy is Section 1.1. It is that clause that sets out the cover provided by the Policy.

12. [27]

    Relevantly, that cover is only in respect of an “Insured Event”: that is an event “referred to in Section 2.1” of the Policy “which occurs during the Period of Insurance”.

13. [28]

    Insurance contracts are to be construed in the same way as any other commercial contract. [5]

14. [29]

    The usual approach when construing such documents is that the words of a definition are to be read into the substantive enactment and the substantive enactment then construed. [6]

15. [30]

    Adopting this approach, and omitting duplication, Section 1.1 reads:

16. [31]

    Section 3.1 provided that the indemnities in Section 2.1 “shall only apply” if, relevantly, the loss is because of the insolvency of the Builder.

17. [32]

    In these circumstances, and untutored by authority, my conclusion would be that the Policy would only respond if the Owners Corporation suffered loss or damage by reason of, relevantly, a breach by the Builder of the Statutory Warranties, which loss or damage it could not recover from the Builder because of, relevantly, the Builder’s insolvency. That is, both the loss and its irrecoverability would have to occur before the Policy responded.

18. [33]

    Construed that way, the insolvency of the Builder was a condition precedent to cover under the Policy. [7] There was no cover unless and until the Builder became insolvent; consistently with the nature of the cover provided by the Policy as being “last resort” cover. [8]

19. [34]

    It would follow that, contrary to the submissions of Mr Ashhurst SC, who appeared with Mr Allen for the Owners Corporation, [9] there was no separate cover for the “reasonable costs” referred to Section 2.3. Section 2.3 was only engaged “upon the occurrence of an Insured Event”: that is an event referred to in Section 2.1. By reason of Section 3.1, that cover was only available if the Builder became insolvent.

20. [35]

    In Drummond v Gordian Runoff Limited ACN 052 179 647, [10] the Court Appeal considered a home warranty insurance policy that contained an insuring clause that was, relevantly, in the following terms:

21. [36]

    As can be seen, unlike the insuring clause in the Policy, the insuring clause in Drummond did not refer to an “Insured Event”.

22. [37]

    However, it appears that the “insured event” in that policy was “the occurrence of the defined loss or damage in circumstances in which there is also the irrecoverability on account of insolvency etc”. [11]

23. [38]

    It can be seen that subparagraph (b) of the insuring clause in Drummond was in the same terms as Section 2.1(b) of the Policy.

24. [39]

    In Drummond, the primary, and dispositive, issue was whether the terms of the policy in question incorporated the provisions of the HBA, such that the insurer’s refusal to pay due to a failure by the insured to give notice as required by s 103BB of the HBA engaged s 54 of the Insurance Contracts Act 1984 (Cth).

25. [40]

    A secondary issue, which was considered by Stern JA [12] to not have any dispositive significance, was the identification of the “loss insured by the policy” and whether the occurrence of a defect in a property was “loss” under the policy or whether such “loss” only occurred at the point when the property owner is unable to recover compensation from the contractor by reason of, relevantly, the contractor’s insolvency. [13]

26. [41]

    In relation to that issue, Stern JA concluded that, while the matter was “finely balanced”, the “better view” was that:

27. [42]

    I am unable to see how the distinction detected by Stern JA in the insuring clause in Drummond exists in the insuring clause in the Policy that I am considering.

28. [43]

    That is because the insuring clause in the Policy, Section 1.1, responds only to loss resulting from an Insured Event; that is an event referred to in Section 2.1, which events, by reason of Section 3.1, “only” attract indemnity “if the insured suffers loss or damage because of”, relevantly, the insolvency of the Builder.

29. [44]

    For that reason, I see nothing in Drummond to compel a conclusion contrary to those set out at [32] to [34] above.

The 21 February 2012 letter

1. [45]

   Mr Ashhurst only relied on the 21 February 2012 letter as “a claim for legal costs and expert costs”; that is, for the “reasonable costs” referred to in Section 2.3 of the Policy.

2. [46]

   The 21 February 2012 letter was headed “Notification of Claim”.

3. [47]

   The letter continued, under the heading “Notification and claim”:

4. [48]

   Under the heading “Reimbursement”, the letter continued, relevantly:

5. [49]

   The 22 February 2012 letter certainly purported to be a “claim”. That purported claim was in relation to work then done under the Building Contract and was for “defective and non-compliant” work; and not, for example, for non-completion of the work or faulty design. That is, the purported claim was for the “Insured Event” referred to in Section 2.1(b) of the Policy; one predicated on, relevantly, the insolvency of the Builder, and not an “Insured Event” referred to in Sections 2.1(a), (c), or (d) of the Policy.

6. [50]

   However, as at 21 February 2012, the Owners Corporation was not entitled to make such a claim under the Policy, whether for “reasonable expense” or at all. That is because there had been no “Insured Event”. The Builder was not then insolvent. The condition precedent inherent in the definition of “Insured Event”, repeated within Section 2.1(b), and repeated generally in relation to Section 2.1 as a whole in Section 3.1, had not occurred.

7. [51]

   In those circumstances the 21 February 2012 letter cannot be construed as a “claim” for the purposes of the Policy. It is for that reason that the answer to the first question is “no”.

8. [52]

   However, as Mr Pesman SC, who appeared for the Insurer, accepted, the letter was available as a notification to the Insurer for the purposes of s 103BB(3) of the HBA which provides, relevantly:

9. [53]

   Implicitly, Mr Pesman’s acceptance of the engagement of s 103BB was an acceptance that, by the 21 February 2012 letter, the Owners Corporation as the “beneficiary under the contract of insurance” had “diligently pursued the enforcement of the statutory warranty” against the Builder and the Developer.

10. [54]

    Thus, the effect of the 21 February 2012 letter was that the Owners Corporation was entitled to make a claim in relation to the loss notified in that letter after the “Period of Insurance” referred to in the Policy; provided that an “Insured Event” had occurred and that the claim was made within the “long stop” limitation period in s 103BC(1) of the HBA: to which I will return. [15]

The date from which the amendments joining the Insurer should take effect

1. [55]

   As I set out above, when Darke J ordered that the Insurer be joined as third defendant to these proceedings, his Honour ordered that the date on which such joinder take effect “be determined at trial”.

2. [56]

   I am not conducting the trial of the proceedings, but I am, rather, determining separate questions.

3. [57]

   In any event, as I have concluded that the 21 February 2012 letter did not constitute a “claim” under the Policy, the question of when the joinder of the Insurer to the proceedings takes effect is of no significance.

The 25 January and 28 June 2022 letters

1. [58]

   There is no dispute that, in these letters, the Owners Corporation made a claim for indemnity under the Policy.

2. [59]

   The question is whether these claims were made within time.

3. [60]

   These claims can be dealt with together as it is common ground that these two claims are both either made within, or out of, time.

4. [61]

   The Insurer contends that both claims are out of time by reason of the “long stop” limitation period provided for in s 103BC(1) of the HBA:

5. [62]

   The Owners Corporation relied on s 92(5) of the HBA which provides:

6. [63]

   The Owners Corporation contends that the effect of s 92(5) is that because, pursuant to the Settlement Agreements, the Builder agreed to perform rectification work, the claims were made within two or six years from “Completion of Work” for the purposes of Section 4.1 of Policy. [16]

7. [64]

   Section 92(5) was introduced into HBA by the Home Building Amendment Act 2014 (NSW) with retrospective effect.

8. [65]

   I was informed by Counsel, and my own research has confirmed, that this is the first time when s 92(5) has received judicial consideration.

9. [66]

   As I have said, the parties’ submissions as to when, for the purposes of the long stop limitation period in s 103BC(1) of the HBA, the “work insured was completed” focused on the Certificate.

10. [67]

    It was common ground that, assuming the Certificate was not a nullity, completion of the original work under the Building Contract took place on 4 September 2008. [17]

11. [68]

    Section 3C of the HBA applies to “residential building work comprising the construction of a new building in a strata scheme”.

12. [69]

    Section 3C(2)(a) provides that:

13. [70]

    The Certificate is expressed to be a “Final” certificate for the “Whole” of the “building works”.

14. [71]

    In the Certificate, Mr Dix certified, relevantly:

15. [72]

    The Owners Corporation contends that the Certificate was not effective because the Development had been constructed inconsistently with the construction certificate to which the Certificate referred.

16. [73]

    The Development is configured on an east-west axis upward from north to south and comprises buildings with units on two levels.

17. [74]

    Some of the lower level units on the southern side of the Development have, on the southern boundary, and accessible from and on the same level as the living areas, a sub-floor space that was described in a brochure prepared by the Builder at the time as a “rumpus room”. The spaces are built into an embankment to the south and configured so that they have, just below their roof level, two small windows facing to the south looking over the top of the embankment. The relevant development approved the nominated area as a sub-floor space.

18. [75]

    The interior of these spaces and the position of the windows facing to the south are depicted in the attached photographs. Photo - Court Book p 121 (200 KB, pdf) Photo - Exhibit JSB-1, p 21 (2.91 MB, pdf)

19. [76]

    The Owners Corporation and Insurer each called expert evidence in relation to this issue. The Owners Corporation’s expert was Mr Allan Harriman, a fire safety engineer and building regulations consultant. The Insurer called Mr Joshua Curan, a registered certifier and practicing building surveyor.

20. [77]

    Both experts agreed that the sub-floor areas did not achieve required natural light and ventilation requirements under the Building Code of Australia to be treated as habitable spaces.

21. [78]

    The relevant construction certificate made no provision for the two windows in the spaces. The experts agreed that the Certificate did not cover any unauthorised building work and did not have the effect of authorising the installation of the two windows.

22. [79]

    Therefore, in terms of s 3C of the HBA, the Certificate did not have the effect of authorising any occupation or use of the whole of the building, in that it did not authorise such occupation or use including those two windows.

23. [80]

    Mr Ashhurst submitted that the consequence of these matters was that the Certificate was a nullity, that occupation of the Development was never authorised and that “work insured” for the purposes of s 103BC of the HBA was never completed; and thus, that the long stop limitation period in that section has never commenced to run.

24. [81]

    I do not accept that submission.

25. [82]

    Section 109H(2) [18] of the EPA Act provided that:

26. [83]

    Assuming that it follows from what I have set out above that the Certificate was issued in contravention of s 109H, I do not accept that it follows that the Certificate is thereby a nullity.

27. [84]

    The relevant principle is that:

28. [85]

    The issue of whether an occupation certificate issued in breach of s 109H(2) of the EPA Act was invalid was considered by White JA in a different case involving the Builder, Dyldam Developments Pty Ltd v The Owners – Strata Plan 85305. [20]

29. [86]

    White JA, with whom Simpson AJA agreed, observed:

30. [87]

    His Honour concluded that the question of whether a breach of s 109H(2) rendered a certificate invalid was “finely balanced”. [22]

31. [88]

    Emmett AJA considered that it was “significant that s 109H does not strike down a certificate issued in contravention of s 109H”. [23]

32. [89]

    In my opinion, the better view is that a certificate issued in breach of s 109H(2) is not invalid.

33. [90]

    Elsewhere in the EPA Act, Parliament provided that a certificate issued in specified circumstances “has no effect”. [24] The fact that Parliament made no such provision in s 109H tends against the conclusion that Parliament intended for such a consequence to follow if a certificate was issued in breach of s 109H.

34. [91]

    Further, the consequences of such invalidity also tell against it being the intended consequence of non-compliance with s 109H(2). If, as the Owners Corporation contends, the Certificate was a nullity by reason of its asserted non-compliance with s 109H(2), this would have the startling result that the Owners’ occupation of the building since 2008 has been unlawful. [25] That outcome would result in significant public inconvenience, a consequence that tells against invalidity being the intended effect of breach of s 109H(2). [26]

35. [92]

    As I have said, s 92(5) of the HBA has not previously been a subject of judicial consideration.

36. [93]

    Mr Ashhurst submitted that the effect of s 92(5) was that the long stop limitation period in s 103BC(1) of the HBA “starts again for rectification work done by the original contractor under a new contract”.

37. [94]

    Mr Ashhurst submitted that if time under the long stop limitation provision in s 103BC(1) of the HBA did start to run on the date of the Certificate, 4 September 2008, and:

38. [95]

    I see nothing in the words of s 92(5) that could lead to that conclusion.

39. [96]

    It would have the alarming effect of potentially extending the long stop limitation period in s 103BC, and thus the term during which an insurer under a policy required by the HBA was on risk, for up to 10 years and up to something that might approach 20 years. Indeed, had the Builder not fallen into insolvency, as long as it performed work every six years, the Policy would respond indefinitely: an outcome that Parliament sought to avoid by enacting s 103BC. [27]

40. [97]

    It is evident from the words used in s 92(5) that the method adopted by the Parliament to confine its potentially wide application was to tether its application to circumstances where the insurance contract was “in force”.

41. [98]

    Thus, the natural and ordinary meaning of the words used in s 92(5) is that for so long as the relevant contract of insurance is “in force” it will “extend” to rectification work, carried out by the same “person” who carried out the “original work”: but would no longer do so once the contract of insurance was no longer “in force”.

42. [99]

    The evident object of the section was to encourage owners and builders to resolve their disputes by a process of rectification of the works, rather than by resolution in the courts or other relevant tribunals leading to a monetary judgment.

43. [100]

    A contract of insurance is “in force” for so long as it is liable to respond to a claim. [28] As Mr Pesman put it, “there has to be cover available”. Once a point has been reached where the contract of insurance cannot respond to a claim, so that no cover is available, it can no longer be said to be “in force”.

44. [101]

    Under the Policy, a claim could only be made during the Period of Insurance; [29] that is, in the events that happened, for up to six years after the completion of the work on 4 September 2008.

45. [102]

    However, as I have explained, the effect of the Owners Corporation’s solicitor’s letter of 21 February 2012 was, by reason of s 103BB of the HBA, to permit the Owners Corporation to make a claim “after the period of insurance”.

46. [103]

    But that entitlement was subject to the long stop limitation period in s 103BC(1) of the HBA. That period ceased “10 years after the work insured was completed”: on 4 September 2018. The Policy then ceased to be “in force”.

47. [104]

    The effect of s 92(5) of the HBA was to extend the Policy to the rectification work contemplated by the 25 July 2017 First Settlement. But the fact remained that by reason of s 103BC(1) a claim had to be made by 4 September 2018. No such claim was, or could then have been, made because there had not then been an “Insured Event” to which the Policy responded. By the time an “Insured Event” occurred, in 2022 upon the Builder going into administration, the long stop limitation period had long passed.

48. [105]

    The result is that the 2022 claims were made out of time. Thus, the answer to the second and third questions is also “no”.

Conclusion

1. [106]

   Each of the separate questions must be answered “no”.

2. [107]

   I will invite submissions as to costs and the further steps to be taken in the proceedings.