New South Wales Supreme Court CITATION : The Owners Strata Plan 61424 & Anor v Reed Constructions Pty Limited [2009] NSWSC 692 HEARING DATE(S) : 20/07/09 JUDGMENT DATE : 24 July 2009 JURISDICTION : Equity Division Technology and Construction List JUDGMENT OF : Einstein J DECISION : First plaintiff was a person entitled to the benefit of a statutory warranty enforceable against the defendant by operation of section 18D of the Home Building Act 1989. CATCHWORDS : Statutory construction - Interpretation Act 1987 - Home Building Act 1989 - Examination of what are the circumstances that entitle a person to the benefit of a statutory warranty as provided for in section 18D of the Home Building Act - Whether the statutory scheme avoids the requirement of privity of contract because it provides its own criterion, which is whether the work was done on behalf of the relevant person - Holding that section 18D avoids the privity of contract rule Building Services Corporation Legislation Amendment Act 1996 Corporations Act 2001 LEGISLATION CITED : Home Building Act 1989 Home Building Regulation 1997 Interpretation Act 1987 CATEGORY : Procedural and other rulings The Owners Strata Plan 61424 (First Plaintiff) PARTIES : Building Insurers' Guarantee Corporation (Second Plaintiff) Reed Constructions Pty Limited (Defendant) FILE NUMBER(S) : SC 55033/08 COUNSEL : Mr T Lynch (Plaintiffs) Mr M Orlov (Defendant) SOLICITORS : Mills Oakley (Plaintiffs) Verekers (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Friday 24 July 2009 55033/08 The Owners Strata Plan 61424 & Anor v Reed Constructions Pty Limited JUDGMENT The proceedings 1 The plaintiffs [The Owners Strata Plan 61424 and the Building Insurers Guarantee Corporation] bring these proceedings against the defendant [Reed Constructions Pty Ltd]. 2 The plaintiffs' contention is that residential building work contracted to be done by the defendant failed to conform to particular warranties applicable to that work by operation of section 18B of the Home Building Act (1989). 3 The plaintiffs' claim is: i. that because of those non-conformities there were defects in that work that required repair and rectification. ii. the defendant is liable to the first plaintiff or alternatively to the second plaintiff for the cost of that repair and rectification. Separate question order 4 The proceedings are presently before the Court in the form of an order for the determination of identified separate questions. 5 In essence the essential issues centre around i. A close understanding of a series of contractual documents; ii. Cross contentions as to whether or not the first plaintiff by dint of the provisions of the Home Building Act 1989 was or was not a person entitled to the benefit of the statutory warranty within the meaning of section 18D of that Act. [It would be appropriate to thumbnail sketch the critical issue as concerning what are the circumstances that entitle a person to the benefit of a statutory warranty as provided for in section 18D of the Act. The plaintiffs' proposition is that the statutory scheme avoids the requirement of privity of contract because it provides its own criterion, which is whether the work was done on behalf of the relevant person. The defendant's proposition is that PRC Pty Ltd [which at all material times owned the land] is a person entitled to the benefit of the statutory warranty enforceable against the defendant if and only if it can be shown that PRC is entitled to sue the defendant directly on a contract with the defendant to do the residential building work made on or after 1 May 1997] 6 It is convenient to presently note that on 15 December 1999: i. a strata plan was registered in respect of the Premises which provided for a number of residential lots and associated facilities; ii. the Premises vested in the first plaintiff; iii. the lots in the strata plan vested in PRC The statutory framework 7 Important amendments to the Home Building Act commenced with the introduction of Part 2C taking effect on 1 May 1, 1997. At the same time Part 6 in its form on 30 April 1997, was repealed and a new scheme of Insurance provided for in the new Part 6. 8 Relevantly, Section 18B identified a number of warranties by the holder of a licence, or a person required to hold a licence before entering into a contract, which warranties were implied in every contract to do residential building work: 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, (c) a warranty that the work will be done in accordance with, and will comply with, this or any other law, (d) a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time, (e) a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling, (f) a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the contractor licence or person required to hold a contractor licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder's or person's skill and judgment. 9 Sections 18C and 18D & G were in the following terms: 18C Warranties as to work by others A person who is the immediate successor in title to an owner-builder, a holder of a contractor licence, a former holder or a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the owner-builder, holder, former holder or developer were required to hold a contractor licence and had done the work under a contract with that successor in title to do the work 18D Extension of statutory warranties (1) A person who is a successor in title to a person entitled to the benefit of a statutory warranty under this Act is entitled to the same rights as the person's predecessor in title in respect of the statutory warranty. (2) Subsection (1) does not give a successor in title any right to enforce a statutory warranty in proceedings in relation to a deficiency in work or materials if the warranty has already been enforced in relation to that particular deficiency by the person's predecessor in title. 18G Warranties may not be excluded A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void. 10 The new Insurance provisions inter alia included the following: 90 Definitions (1) In this Part: contractor means a person required by section 92 to enter into a contract of insurance. developer , in relation to residential building work, means an individual, partnership or corporation (other than a company referred to in section 3A (3)) on whose behalf the work is done in the circumstances set out in section 3A (2). home warranty insurance means insurance under a contract of insurance required to be entered into by or under this Part. insolvent means: (a) in relation to an individual, that the individual is insolvent under administration (within the meaning of the Corporations Act 2001 of the Commonwealth), or (b) in relation to a corporation, that the corporation is an externally-administered body corporate (within the meaning of the Corporations Act 2001 of the Commonwealth). insurance industry deed means an agreement referred to in section 103A (5). owner-builder work means owner-builder work within the meaning of Division 3 of Part 3 that involves: (a) the construction of a dwelling, or (b) the alteration of, or additions to, a dwelling, or (c) the construction of an in-ground swimming pool. supplier means a supplier of a kit home required by section 93 to enter into a contract of insurance. (2) A reference in this Part to the disappearance of a contractor, supplier or owner-builder includes a reference to the fact that, after due search and inquiry, the contractor, supplier or owner-builder cannot be found. 91 When Part applies (1) This Part, as amended by the Building Services Corporation Legislation Amendment Act 1996 , applies to residential building work or owner-builder work only to the extent that it is done or is to be done or has been done under a contract made on or after the date of commencement of this section or, if it is done otherwise than under a contract, only to the extent that it is commenced on or after that commencement. (2) This Part, as amended by the Building Services Corporation Legislation Amendment Act 1996 , applies to kit homes supplied or to be supplied under a contract made on or after the date of commencement of this section 11 Section 92 dealing with contract work which must be insured, provided inter alia that the person must not contract to do any residential building work unless a contract of Insurance compliant with the Act was in force in relation to the proposed work. [Section 99 dealing with the requirements for insurance for residential building work relevantly provided that a contract of Insurance in relation to residential building work required by section 92 must insure: (b) a person on whose behalf the 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.] 12 Section 96 [dealing with insurance by developers and other persons] prohibited: i. a person who did residential building work otherwise than under a contract, or ii. a developer who did residential building work from doing such work unless a contract of Insurance compliant with the Act is in force in relation to that work. 13 Section 101 [dealing with the requirements for insurance by owner-builders, developers and others] provided that a contract for insurance in relation to owner-builder work or residential building work required by section 95 or 96 must insure a purchaser of the land on which the work is done and the purchaser's successors in title against the risk of loss arising from a breach of a statutory warranty in respect of the work. 14 The difference between the scheme Insurance under Part 6 on and from 1 May 1997 and its predecessor, inheres in the circumstance that the anterior scheme: (a) was held not to be Insurance, but a statutory indemnity scheme; (b) had operated, not by reference to the existence of a contract, but by the status of the person doing the work as a licensed contractor or unlicensed contractor. Agreed Statements 15 The parties have agreed upon a statement of preliminary issues, facts and premises: A. Statement of preliminary issues In the premises stated in Part B below and upon the true construction of the Joint Venture Agreement (as amended by the 31 October 1997 Agreement), Early Works Deed, Building Contract (as amended by February 1998 Deed), Construction Guarantee, Construction Management Deed, Building Contract Tie in Deed, HIH Policy and the Settlement Deed (as described in Part B), or such of them as may be material in light of the allegations in the List Statement and allegations and admissions in the List Response: 1. Is the first plaintiff a person entitled to the benefit of a statutory warranty enforceable against the defendant by operation of s. 18D of the Home Building Act 1989 ? ( List Statement [16], [22]; List Response [23], [34], [37], [38], [39] – [42] ) 2. Does the HIH Policy respond to a claim by the first plaintiff in respect of loss suffered as a result of a breach of statutory warranty by the defendant? ( List Statement [23] – [27]; List Response [35] - [38] ) 3. Was the first plaintiff a person to whom the provisions of Part 6A of the Home Building Act 1989 applied? ( List Statement [23] – [27]; List Response [35] – [38] ) [In the result by reason of the respective approaches taken during the hearing, issues 2 and 3 fell away it being common ground that the HIH Policy did respond to any work done at the Premises after 4 June 1999 by the defendant ] B. Statement of facts and premises 1. On 21 March 1997 PRC P/L and Wallis Street Developments P/L entered into a Joint Venture Agreement in writing for the purpose of jointly developing for sale and profit 38 strata title aged person units with basement car parking on land owned by PRC P/L (the Land) at the corner of Wallis and Nelson Streets, Woollahra in Sydney (the Project). 2. The construction of the Project was residential building work within the meaning of the Home Building Act 1989 . 3. The Building Services Corporation Amendment Act 1996 commenced on 1 May 1997 at which time s. 3A and Part 2C - Statutory Warranties of the Home Building Act 1989 came into force. 4. PRC P/L and Wallis Street Developments P/L amended the Joint Venture Agreement by an agreement in writing dated 31 October 1997 (31 October 1997 Agreement) to provide, inter alia, for PRC P/L and Wallis Street Developments P/L to enter into a tripartite deed with the defendant to undertake certain Early Works (particularised in a letter from the defendant to Wallis Street Developments P/L dated 28 October 1997). 5. On 10 November 1997 PRC P/L, Wallis Street Developments and the defendant entered into a deed (Early Works Deed). 6. The work to be done under the Early Works Deed was residential building work within the meaning of the Home Building Act 1989 . 7. On 11 December 1997, Wallis Street Developments P/L entered into a design and construction contract (Building Contract) for the Project with Australian Construction Enterprises P/L (the Builder). 8. The work to be done under the Building Contract was residential building work within the meaning of the Home Building Act 1989 . 9. On 23 December 1997, Adelaide Bank Ltd (the Bank), Wallis Street Developments P/L and the defendant entered into a deed of guarantee (Construction Guarantee). 10. On 23 December 1997, Wallis Street Developments P/L and the defendant entered into a deed (Construction Management Deed). 11. On 24 December 1997, the Bank, Wallis Street Developments P/L, the Builder, PRC P/L and the defendant entered into a deed (Building Contract Tie In Deed). 12. In February 1998, Wallis Street Developments P/L and the Builder entered into a deed (February 1998 Deed) under which the parties agreed to amend the Building Contract in various ways, with effect from 11 December 1997 [ clause 1 ] including to confirm that the warranties provided for in the Home Building Act 1989 were incorporated into the Building Contract [ clause 24 ]. 13. On 28 June 1999 the Builder purported to terminate the Building Contract having partly completed the Project by that time. 14. The work which had been completed at that time and the work which remained to complete the Project is presumed (without admission by the plaintiffs) to be as documented in a 4 volume report prepared by Rider Hunt Sydney P/L in August 1999 titled: 'Volume 1 – Summary of Costs'; 'Volume 2 – Architectural Works'; 'Volume 3 – Services Works'; Volume 4 – Photographs'. 15. By an undated letter served on the Builder on or about 8 July 1999, Wallis Street Developments P/L accepted the Builder's repudiation of the Building Contract. 16. Thereafter the defendant assumed the responsibility to complete the construction of the Project in accordance with the terms and conditions of the Building Contract under the provisions of the Construction Guarantee, Construction Management Deed and the Building Contract Tie in Deed. 17. A contract of insurance was in force in respect of the defendant's work referred to in paragraph 15, in compliance with ss. 92 and 99 of the Act and Clause 42 of the Home Building Regulation 1997 – namely, Certificate of Insurance dated 1 September 1999 in respect of HIH Casualty & General Insurance Limited (HIH) Policy No 1804587840 including Endorsement dated 1 September 1999 covering work performed by the defendant to complete the Project and 'Master Home Warranty Annual Blanket "Extra" Cover (Full 7 Year Warranty) NSW' Policy document and Policy Schedule (the HIH Policy). 18. The construction of the Project was completed shortly before 15 December 1999. 19. Upon completion all of the apartment dwellings were owned by PRC P/L. 20. On 15 December 1999 the Land was subdivided by registration of Strata Plan No 61424 and became the land comprised in the Common Property and Lots 1 to 39. 21. It is presumed (without admission by the defendant) that, upon completion, there were defects in the Common Property (the Defects) resulting from breaches by the defendant of one or more of the warranties provided by the Home Building Act 1989 as alleged in paragraphs 19 and 20 of the List Statement. 22. On 18 October 2000, PRC P/L, Wallis Street Developments P/L and the defendant entered into a deed (Settlement Deed) under which the parties agreed to settle certain disputes that had arisen between the parties in connection with the Project. 23. It is presumed (without admission by the defendant) that on or about 10 October 2007, pursuant to s. 103M of the Home Building Act 1989 , the second plaintiff indemnified the first plaintiff in respect of the cost of rectifying the Defects and to date has paid the sum of $520,241.55 on account of the Defects. 24. It is admitted by the defendant that if PRC P/L is a person entitled to the benefit of a statutory warranty enforceable against the defendant within the meaning of s. 18D of the Home Building Act 1989 , then the first plaintiff also is a person entitled to the benefit of such statutory warranty enforceable against the defendant by operation of s. 18D of the Act. 25. It is admitted by the defendant that if the HIH Policy responds to a claim by PRC P/L in respect of loss suffered as a result of a breach of statutory warranty by the defendant, then it also responds to a claim by the first plaintiff in respect of such loss. Returning to the fundamental question 16 During the hearing the plaintiffs accepted as correct the defendants contention that they had contracted with Wallis Street Developments to do the residential building work comprising the Project after 1 May 1997. In other words the plaintiffs accepted that that building contract was not one to which PRC was a party. Hence the task of the plaintiffs was suggested as requiring it to 'find a bridge' from Wallis Street Developments to PRC. 17 The defendant sought to rely upon section 33 of the Interpretation Act 1987 which is in the following terms: "In the interpretation of a provision of an Act or statutory rule, a construction that would promote the purpose or object underlying the Act or statutory rule (whether or not that purpose or object is expressly stated in the Act or statutory rule or, in the case of a statutory rule, in the Act under which the rule was made) shall be preferred to a construction that would not promote that purpose or object." 18 In essence the plaintiffs rely upon the requirement in section 99 [dealing with insurance for residential building work] which requires that a contract of Insurance in relation to residential building work required by section 92 must insure a person on whose behalf the work is being done and that person's successors in title against the risk of loss arising from a breach of statutory warranty in respect of the work. 19 In that regard the plaintiff's proposition is that the phrase "a person on whose behalf the work is being done" is not a technical phrase but raises a factual enquiry into the circumstances of the matter. The plaintiffs here point out that the defendant acknowledges that PRC was in fact a corporation on whose behalf the work was done. However the defendant contends that the work was not done by it. 20 The plaintiffs simply contend that the question of entitlement is answered by a factual enquiry as to whether or not the work was done on behalf of PRC in the circumstances of the present case. Dealing with the matter 21 In my view the scheme of the Act read in terms of applying a construction appropriate to promote the purpose /object underlying the legislation, results in a construction favouring the plaintiffs principal proposition: In short the circumstances which entitle a person to the benefit of the statutory warranty provided for in section 18D are satisfied when that work is done on behalf of that person within the concept expressed in those terms in sections 3A, 99 and 101 of the Act 22 In other words the defendants central proposition is flawed. That proposition ran as follows: Under the Act there are three [and only three] circumstances in which Party A may be entitled to the benefit of a statutory warranty enforceable against Party B: i. first, under s. 18B, where Party A is entitled to sue Party B directly on the contract with Party B to do the residential building work made on or after 1 May 1997; ii. second, under s. 18 C, where Party A is the immediate successor in title to Party B and Party B is an owner-builder, a holder of a contractor licence, a former holder or a developer who has done residential building work on the land and despite the absence of any contract between Party A and Party B for the latter to do the work; iii. third, under s. 18D, where Party A is a successor in title to a person entitled to the benefit of a statutory warranty enforceable against Party B. 23 The flaw in the proposition is that subparagraph iii should be extended to pick up more than mere privity of contract. So much is apparent from the terms of section 18D itself, because that section makes clear that regardless of the identity of whomever it is that is entitled to the benefit of a statutory warranty, someone else who is not privy to the contract obtains the benefit of that warranty. Hence section 18D itself avoids the privity of contract rule. 24 In truth the enquiry into what are the circumstances that entitle a person to the benefit of a statutory warranty as provided for in clause 18D is answered as follows: when that work is done on behalf of that person within the concept expressed in those terms in sections 3A and 99 and 101". 25 I further accept as of substance the plaintiff's contention that the rights in sections 18C and 18D are cumulative and not exclusive. As the plaintiffs contended it follows that the requirements for insurance in sections 92 and 96 are alternatives and not exclusives. 26 The defendants contention that this amounts to judicial legislation or a radical reworking of the statutory scheme [or an extension of that] is simply inconsistent with section 18D itself 27 Other indicia to the same effect include the fact that there may be, as a matter of definition, more than one builder who undertakes the same residential building work. As the plaintiffs have contended that is apparent from the very definition of residential building work which relates to work involved in construction and work involved in coordination or supervising. It is implicit in that formulation that there may be persons involved in construction and persons involved in coordinating the supervising, both of whom will be builders of that work. Decision 28 For the above reasons question one is answered in the affirmative. 29 The parties are to bring in short minutes of order on which occasion costs may be argued. ********* 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.