Civil and Administrative Tribunal New South Wales Medium Neutral Citation: The Owners – Strata Plan 92156 v Professional Construction Services Pty Ltd [2023] NSWCATCD 100 Hearing dates: 1 May 2023 Date of orders: 01 August 2023 Decision date: 01 August 2023 Jurisdiction: Consumer and Commercial Division Before: K Ross, Senior Member Decision: (1) Professional Construction Services Pty Ltd is to pay The Owners - SP 92156 the sum of $234,046.56, on or before 31 August 2023. (2) The applicant is to file and serve submissions in support of any cost application by 17 August 2023. (3) Submissions in response are to be filed and served by 31 August 2023. (4) Submissions in reply are to be filed and served by 7 September 2023. Catchwords: BUILDING & CONSTRUCTION; Home Building – breach of statutory warranties – where work involved the conversion to residential use of a commercial space – scope of contract -effect of implied warranties. Legislation Cited: Home Building Act 1989 Cases Cited: Oikos Constructions Pty Ltd t/as Lars Fischer Construction v Ostin [2020] NSWCA 358 Category: Principal judgment Parties: The Owners – Strata Plan 92156 Professional Construction Services Pty Ltd Representation: Counsel: Horobin, P, Applicant Justice, AD, Respondent Solicitors: Chambers Russell, Applicant MRM Lawyers, Respondent File Number(s): HB 21/51775 Publication restriction: unrestricted REASONS FOR DECISION The dispute 1. This claim arises from residential building work undertaken by the respondent ("the Builder") pursuant to a contract ("the Contract") with Michael Butler of Korda Mentha in his capacity as the receiver and administrator of the registered proprietor of the land at the time, Steve Nolan Constructions Pty Ltd. It is brought by the applicant as successor in title. The scope of the Contract, and the obligations of the respondent under it, form part of the dispute between the parties. 2. The applicant alleges that the work carried out by the respondent breached the statutory warranties in s 18B of the Home Building Act 1989 (the Act) in respect of 5 items: * Unit 12 – bedroom window leak, * Unit 11 – ensuite leak to walk in robe, * Unit 11 – Water ingress to lounge, dining, bathroom, and laundry, * Unit 11 – water ingress through bed 1 sliding door, and * Fire penetrations 1. The respondent says that it did not carry out some of the work about which the applicant complains and submits that at least some of the defects complained of are not major defects, such that the Tribunal does not have jurisdiction in respect of them. The respondent seeks that the application be dismissed, or if defects are found, that it be given an opportunity to rectify them. 2. It is not disputed that the work which was carried out by the respondent involved the conversion of a commercial lot into two residential units. The respondent tendered for the work and entered into the Contract. The tender document included a scope of work, relevantly including: Restaurant area Check water penetration windows and column along front façade. Allow to rectify water ingress underneath windowsills and columns. New Work to Construct to (sic) New Units Form new openings in the external walls for insertion of new aluminium window frames to bedrooms and bathrooms. Provide waterproofing to all wet areas to comply with the BCA. Note: All new penetrations in the concrete floors are to be fire rated in accordance with the requirements of the PCA. All redundant penetrations in the existing concrete floor are to be filled with concrete. Trace and make good water leaks to the enclosed terrace around columns and fixed frames. Supply and instal new wall tiles to ensuites bathroom and new laundry. 1. As a result of the work carried out, the commercial lot which had been used as a restaurant was converted into two residential units. Part of that space had been a balcony area which had previously been enclosed to form part of the restaurant. At some time, an extra layer of tiles was laid over part of the floor, and the experts agreed that this was contributing to the water ingress issues. The respondent denies laying that extra layer of tiles. The applicant asks the Tribunal to find, on the balance of probabilities, that it did. 2. The applicant submits that the respondent is responsible for the water ingress issues, because it had a contractual obligation to investigate and rectify them. In addition, the applicant submits that as the Contract required the conversion of a non-habitable space into a habitable space, the respondent's obligations extended to ensuring that the work it did complied with the statutory warranties, and resulted in a dwelling which would be fit for that use. 3. The respondent submits that it is not responsible for any defects in the "base building" because that work was carried out by Steve Nolan Constructions, and the applicant has been compensated for those defects, which were the subject of a separate claim. Issues 1. The dispute raises a number of issues for determination: 1. Did the respondent lay the second layer of travertine tiles? 2. What responsibility does the respondent have in respect of water ingress issues? 3. In respect of each alleged defect: 1. Is the defect alleged a major defect as defined in the Act? 2. Is the respondent responsible for the alleged defect? 3. What is required to rectify the defect and at what cost? 1. Should the Tribunal make a work order or a money order? Did the respondent lay the second layer of travertine tiles? 1. There is no dispute that at some time, someone laid a second layer of tiles over an area of what had been the terrace, covering the sill of the doors. The applicant relies upon the photographs annexed to the tender document, where the sill is visible, and compares that to the fact that the sills are no longer visible in later photos. The applicant's expert has carried out some destructive investigation and has uncovered two layers of tiles. The applicant submits that on the balance of probabilities, the respondent laid the second layer of tiles. 2. The respondent denies doing so. Mr Jones, the respondent's principal, gave evidence that at the time he first saw the project, the second layer of tiles had already been laid. He was not shaken under cross examination. 3. The applicant has the onus of proof. I am not satisfied that it has proven that the respondent laid the second layer of tiles. There is no evidence of when the photos annexed to the tender document were taken. It is clear that the restaurant was still fitted out, but there is no evidence of when the furniture was removed. 4. The applicant submits that the respondent's evidence on this point should not be accepted, because documents which might have supported the Builder's denial have not been produced. However, it is not for the respondent to prove that he didn't lay the tiles, but rather for the applicant to prove that he did. What responsibility does the respondent have in respect of water ingress issues? 1. The scope of work in the tender documents was incorporated into the Contract. This included an obligation for the Builder to "Check water penetration windows and column along front façade; Allow to rectify water ingress underneath windowsills and columns; Trace and make good water leaks to the enclosed terrace around columns and fixed frames." 1. The Builder does not dispute that it had an obligation in respect of these specific matters, but says that it complied with these obligations.. 2. In respect of this work, the statutory warranties apply. This includes a warranty [s 18B (1) (e)] that the work must "result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling". 3. The extent of the obligations created by s 18B were the subject of discussion in Oikos Constructions Pty Ltd t/as Lars Fischer Construction v Ostin [2020] NSWCA 358 (Oikos). That case also involved remediation of water ingress issues: 78 In Builders Insurers Guarantee Corporation v The Owners – Strata Plan 60848 [2012] NSWCA 375, Bergin CJ in Eq said (at [46]-[47]): "46 Owners made a submission that there are aspects of building work that would be necessarily incidental to the work a builder is contracted to conduct. For instance it was submitted that if a builder is contracted to construct windows in a building and fails to install appropriate flashings thereby allowing water ingress, the failure to install the flashings would fall within the expression "to the extent of the work conducted" in s 18B of the HB Act, notwithstanding that it was work that was not done. I agree with that submission. If a builder in a do and charge contract is instructed to install windows and fails to install flashings, liability under s 18B(e) of the HB Act would be triggered. ... 47 The Tribunal decided that there was no provision in the do and charge contract that the builder was to do (or conduct) the waterproofing work. That does not amount to a provision in a do and charge contract that the builder was to omit from the scope of work for which he was contracted, work that was necessarily incidental to that work." 79 The work of rectifying faulty cavity flashings was not necessarily incidental to the work Oikos agreed to perform. There was a fundamental difference between contracting to do work such as the installation of windows which imports the doing of things necessarily incidental to the proper performance of that work, and doing specified remedial work designed to address a problem whose causes are not known. 80 The warranties in s 18B are implied in every contract to do residential building work. The reference to "the work" in paras (a)-(f) of s 18B is to the residential building work the subject of the contract. Residential building work is defined to include any work involved in the construction of a dwelling, the making of alterations or additions to a dwelling, or the repairing, renovation or protective treatment of a dwelling (s 3). Oikos submitted that the warranties stipulated by s 18B apply to the work contracted to be done and cannot expand the scope of the work contracted to be done. I do not accept the submission in so absolute a form. 81 In some circumstances the operation of the warranties may expand the scope of work that a builder contracts to do. Thus, a builder cannot avoid the operation of the warranty under s 18B(b) that the materials supplied be good and suitable by specifying sub-standard materials. A builder cannot avoid the warranty in s 18B(c) that the work comply with the law by relying on the fact that the plans and specifications do not include the provision of sprinklers required by law (The Owners – Strata Plan No 66375 v King [2018] NSWCA 170 at [332], [399]-[409]). 82 The present case is different. The warranties on which the respondents rely to expand the scope of the work from that stated in the email of 13 May 2011 are those in s 18B(e) and (f). Neither the warranty that the work the subject of the email of 13 May 2011 would be performed with due care and skill, nor that the materials supplied by Oikos would be new and good and suitable for the purpose for which they were used (s 18B(a) and (b)) could expand the scope of the work required to be carried out. 83 Section 18B(e) provides for a warranty where the work consists of the making of alterations to the dwelling or the repairing, renovation or protective treatment of a dwelling, that the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling. The underlined words show that the warranty is not so wide as to require that once the work contracted to be done has been done the dwelling will be reasonably fit for occupation. The warranty is given only "to the extent of the work conducted". I assume, without deciding, that that expression will extend to the work contracted to be done as well as the work actually done. (In any event, the builder would be liable for damages resulting from failure to do work agreed to be done but not done.) But those emphasised words negative any idea that the scope of works expressly agreed on is impliedly expanded by the warranty of reasonable fitness for occupation under s 18B(e). That is, if the dwelling, or parts of the dwelling, are not reasonably fit for occupation by reason of defects that are outside "the extent of the work conducted", the warranty in s 18B would not be breached. Therefore, that warranty cannot extend the expressly agreed scope of works. 1. The Builder's obligation was to carry out the scope of work required by the Contract. That required that the Builder to investigate the source and cause of water leaks and "trace" the water leaks in order to rectify them. In doing so the Builder had an obligation to carry out any additional work incidental to that work. This would include installing flashings. However, I do not accept the applicant's submission that the Builder's obligation extended: "to ensure that there was no water penetration into the internal areas of the residence even if that requirement was not expressly stated". 1. This would be to extend the operation of the warranties beyond "the extent of the work carried out". 2. The consequence of this distinction will be considered below in respect of each of the claimed defects. 3. I do not accept the Builder's submission that the facts in the current matter can be distinguished from the facts in Oikos. The facts are actually quite similar. Both matters deal with water ingress issues and rectification of those issues. In both cases, the builder being pursued did not construct the original building. It is true that in Oikos there was an additional issue in relation to the purchaser's position. Otherwise, the conclusion reached in Oikos apples to the current dispute. The expert evidence 1. The applicant relied upon evidence from Mr Michael Waddell of Broadscope Building Consultants. The respondent relied upon evidence from Mr Ben Sharman of Collective Construction Management. The experts produced a joint report in the form of a joint Scott Schedule. There was a large degree of agreement between them. 2. The expert evidence will allow the Tribunal to determine the nature or cause of the defects observed and to go on to consider whether those defects are in relation to work carried out by the Builder, required by the Contract to be carried out, or incidental to that work. The time limit issue 1. Section 18E provides that a claim must be brought within the time limits set out. The time limit is 2 years unless the defect is a major defect as defined, in which case the time limit is 6 years. It is not disputed that in this matter, time runs from the date on which the final occupation certificate was issued, 4 April 2016. This application was filed on 17 December 2021. In order for the Tribunal to have jurisdiction, the defect complained of must be a major defect [s 18E (4)]: "major defect" means-- (a) a defect in a major element of a building that is attributable to defective design, defective or faulty workmanship, defective materials, or a failure to comply with the structural performance requirements of the National Construction Code (or any combination of these), and that causes, or is likely to cause-- (i) the inability to inhabit or use the building (or part of the building) for its intended purpose, or (ii) the destruction of the building or any part of the building, or (iii) a threat of collapse of the building or any part of the building, or (b) a defect of a kind that is prescribed by the regulations as a major defect, or (c) the use of a building product (within the meaning of the Building Products (Safety) Act 2017 ) in contravention of that Act. Note : The definition of "major defect" also applies for the purposes of section 103B (Period of cover). "major element" of a building means-- (a) an internal or external load-bearing component of a building that is essential to the stability of the building, or any part of it (including but not limited to foundations and footings, floors, walls, roofs, columns and beams), or (b) a fire safety system, or (c) waterproofing, or (d) any other element that is prescribed by the regulations as a major element of a building. 1. A determination of whether each alleged defect is a major defect is required. Item 1 - Unit 12 – bedroom window leak 1. The experts agree that the window in defective because no compliant sill flashing has been installed. They agree that in order for this defect to be rectified, the window needs to be removed and a compliant sill flashing needs to be installed. They agreed whilst giving joint evidence to compromise on the cost, coming to an amount of $2543 ex GST. 2. The Builder concedes that the defect is a defect in a major element of the building, being waterproofing, but submits that the evidence is insufficient for the Tribunal to determine that the second limb of the definition in s18E has been satisfied. I do not accept this submission. I accept that where a window has been installed without compliant flashing, it is likely to leak. There does not need to be evidence that it has leaked. However, I accept the evidence of Mr Waddell that he observed some evidence of water ingress, including evidence of mould on the underlay of the carpet. I am satisfied that, because of the destructive nature of water ingress, over time it is likely that the leaking will cause an inability to inhabit or use part of the building for its intended purpose and may cause the destruction of part of the building. 3. I am satisfied that this item is a major defect and the Tribunal has jurisdiction in respect of it. I accept the joint evidence of the experts as to the rectification and cost. Item 2 – Unit 11 ensuite water escape to walk in robe 1. The experts agree that the tiles in the ensuite fall towards the door and not to the drain. The carpet in the walk-in robe had been removed by the time the experts inspected the room. The applicant's expert said that the owner of the unit advised him that the carpet was removed because it had become saturated. 2. I accept the Builder's submission that there is no direct evidence from the owner of the unit in relation to the removal of the carpet. However, the Tribunal is not bound by the rules of evidence. I accept that it is more likely than not that the carpet had become wet as claimed because of the defect agreed by the experts. 3. The applicant's expert also reported that the drainage flange and water stop were incorrectly fitted. The respondent's expert disagreed. The dispute was somewhat academic because the experts agreed that rectification of the tiling issue will require that the floor tiles be removed, and in doing so, the flange and water stop will need to be reinstalled. 4. In submissions the respondent says that the applicant abandoned the allegation of defects in the flange and water stop. I do not accept this characterisation of what happened. The experts agreed that in practice any defects in the water stop and flange would be addressed by the scope of work for the tiling issues, and for this reason the Tribunal encouraged them not to waste time arguing over it. 5. The respondent alleges that the issue is important because the tiling issue on its own is not a defect in a major element of the building. I do not accept this submission. The tiling acts with the waterproof membrane and the water stop to create the waterproofing of the room. The tiling forms part of the waterproofing system. Where, as here, the tiles are incorrectly laid such as to direct water outside of the room, that is a defect in the waterproofing and as such, it is a defect in a major element of the building. 6. In relation to rectification, the experts agree that all of the floor tiles and the wall tiles to ceiling height in the shower area will need to be removed and replaced. The applicant's expert said that it would also be necessary to replace all the wall tiles outside the shower area, whilst the respondent's expert said that replacement of one row of tiles only would be necessary. He said that as there is natural variation in the travertine tiling, it would not be necessary to replace all of the tiles. 7. The applicant's expert did not agree and said that there was still likely to be a noticeable variation in any replacement tiles. 8. I will allow replacement of all of the wall tiles. I am not satisfied that replacing only some of the tiles will not lead to a visual difference in the tiles. The owner is entitled to be put in the position he would have been in if the work had complied with the Builder's obligations when it was carried out (with the tiling from one batch and not batches years apart). 9. The experts also differ on quantum in respect of this item. The applicant's expert estimates a cost of $22,600.00 whilst the respondent's expert estimates $6582.54. This is partly due to the difference in scope and partly due to a difference in rates. The applicant's expert has also referenced quotes obtained to carry out the work. 10. I will allow the amount calculated by the applicant's exert as it addresses the scope which I have found to be required and is supported by the quotations provided. Item 3 - Unit 11 – Water ingress to lounge, dining, bathroom, and laundry 1. The experts agree that there is water ingress as alleged. They also agree that the second layer of travertine tiles, referred to above, is contributing to the ingress of water, and that there are defects in the base building which are contributing to the water ingress. 2. The applicants concede that the Builder did not directly affix the plasterboard to the brick columns, and I have found that the Builder did not lay the second layer of travertine tiles. 3. However, the Builder was contractually required to address the water ingress issues which were apparent at the time of the tender. He was also required to ensure that any work which he carried out resulted in an area which was fit for habitation as a residence. He said that he had carried out the work he was required by the Contract to do because he checked the columns, but it is apparent that the work he carried out did not adequately address the water ingress issues. Likewise, he may not have laid the second layer of tiles, but he was contractually obliged to "Trace and make good water leaks to the enclosed terrace around columns and fixed frames". If at the tender stage he could not identify what needed to be done, it was open to him to include a note to that effect, and to provide for a variation if other work was required. As was conceded by the respondent's expert under cross examination, when carrying out the work, the Builder's contractual obligations required that he undertake such investigation (including destructive investigation) as might be required in order to fulfil his contractual obligations. 4. I am satisfied that the Builder has failed to rectify the water ingress issues and is in breach of the Contract and the statutory warranties in this regard. 5. The Builder's expert was critical of the scope of work and quantum proposed by the applicant's expert but did not provide an alternative scope or cost. This leaves the Tribunal only with the applicant's evidence in this regard. 6. The applicant's expert obtained 3 quotations. He excluded the highest quotation and averaged the other two. I will accordingly allow the sum of $150,000 in accordance with the applicant's expert's report. Item 4- Unit 11 – water ingress through bed 1 sliding door 1. The experts agree that there is water ingress through the sliding door and agreed the scope of rectification. The Builder submits however that the applicant has failed to prove that the defect is a major defect, because there is no evidence to prove the second limb of the definition of major defect in s18E(4) of the Act. 2. I do not accept the Builder's submission, for similar reasons to those explained in relation to item 1. Where water ingress is occurring, there is a likelihood that it will lead to an inability to use the affected areas for their intended purpose. There is also a likelihood that the affected area will be destroyed if the water ingress continues. There does not need to be evidence of damage having already occurred. 3. I am satisfied that the defect is a major defect. 4. During the hearing the experts agreed that if the item was found they would split the difference on the cost, and proposed an amount of $2765.00 + GST. 5. I therefore adopt the scope of work and quantum agreed by the experts. Fire Penetrations 1. There is no dispute that the original scope of work required the Builder to fill all redundant penetrations with concrete and ensure that all new penetrations were fire rated. The applicant seeks reimbursement of an amount of $12,580.00 plus GST which it says it has incurred in rectifying defective fire penetrations. 2. The applicant relies upon a report of All Passive Services and an invoice from All Fired Up Services in the sum of $12,353.00 in support of this claim. However, the work in the invoice does not relate to fire penetrations. There is no evidence that the quotation in the All Passive Services report was accepted, nor any evidence that the work was carried out. 3. I am not satisfied that the applicant has discharged the onus of proving that it has (or will) incur the amount it is claiming and I dismiss this claim. Builder's margin 1. The issue in respect of Builder's margin was not canvassed during the hearing. The applicant's expert contends for a margin of 20%, whilst the builder's expert was prepared to allow 25%. I will allow 20% because that is the margin contained in the applicant's preferred quotation. Uplift for inflation 1. The applicant submitted that, as the experts had agreed that there have been increases in costs, the Tribunal should increase any award made to compensate the applicant for this fact. However, the quantum of such increase was not specified, and the evidence of the experts was imprecise. The applicant could have presented updated quotations as part of its case but did not do so, and on this basis I decline to allow any uplift to the amount claimed. Money order or work order? 1. The Builder has at all times argued that he is not responsible to rectify the defects complained of, because he did not undertake the original work. Whilst he now seeks that the Tribunal make a work order, I have no confidence that this would result in a just, quick and cheap resolution of the real issues in dispute. The Builder had the opportunity initially to rectify the water ingress issues but the work he carried out was unsuccessful. He had a further opportunity to carry out rectification pursuant to the Department of Fair Trading Rectification Order, but the issues remain. I am satisfied that this is a matter in which the preferred outcome is not appropriate. 2. I will accordingly order the respondent to pay the applicant the sum of $234,046.56 as follows: 1. Item 1……………………………………....$2,543.00 2. Item 2 ……………………………………...$22,000.00 3. Item 3 ……………………………………...$150,000.00 4. Item 4 ……………………………………...$2765.00 5. Subtotal …………………………………...$177,308.00 6. Plus margin @20% ………………………$35,461.60 7. Subtotal …………………………………....$212,769.60 8. Plus GST …………………………………..$21,276.96 9. TOTAL ……………………………………. $234,046.56 Costs 1. I will provide for submissions in relation to costs. Orders 1. Professional Construction Services Pty Ltd is to pay the Owners -SP 92156 the sum of $234,046.56, on or before 31 August 2023. 2. The applicant is to file and serve submissions in support of any cost application by 17 August 2023. 3. Submissions in response are to be filed and served by 31 August 2023. 4. Submissions in replay are to be filed and served by 7 September 2023. ********** I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 26 September 2023