Supreme Court New South Wales Medium Neutral Citation: The Owners – Strata Plan 84741 v Nazero Constructions Pty Ltd [2017] NSWSC 1134 Hearing dates: 21 & 22 August 2017 Decision date: 29 August 2017 Jurisdiction: Equity - Technology and Construction List Before: Stevenson J Decision: Defect rectification costs quantified; parties to calculate final figure due from second defendant to plaintiff Catchwords: BUILDING AND CONSTRUCTION – whether quantification of defect rectification costs reasonable – whether plaintiff entitled to pre-judgment interest on quantification of defect rectification costs PRACTICE AND PROCEDURE – whether second defendant should have leave under UCPR r 31.28(3) to rely on expert report served by former cross-defendant – whether exceptional circumstances shown Legislation Cited: Home Building Act 1989 (NSW) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Cummins Generator Technologies Germany GmbH v Johnson Controls Australia Pty Ltd [2015] NSWCA 264 Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 McCartney v Orica Investments Pty Ltd [2011] NSWCA 337 The Owners Strata Plan No 66375 v Suncorp Metway Insurance Ltd (no 2) [2017] NSWSC 739 Texts Cited: Rawlinsons Australian Construction Handbook 2015 (Rawlinson 2015 ed. 33) Category: Principal judgment Parties: The Owners – Strata Plan 84741 (Plaintiff) Iris Diversified Property Pty Ltd (Second Defendant) Representation: Counsel: R Cheney SC with H Chiu (Plaintiff) A McGrath SC (Second Defendant) Solicitors: DEA Lawyers (Plaintiff) Henry Davis York (Second Defendant) File Number(s): SC 2014/367636 Judgment 1. On 12 July 2011, the second defendant, Iris Diversified Property Pty Ltd, as principal, entered into a building contract with the first defendant, Nazero Constructions Pty Ltd (in liquidation), to construct a residential block of six units in Clovelly. A director of Nazero, Mr Wardy Younan executed the building contract as guarantor. 2. Construction of the building was completed and an Occupation Certification granted on 13 September 2012. 3. On 9 October 2012, Strata Plan 84741 was registered, vesting ownership of the common property in the plaintiff, the Owners Corporation. 4. The Owners Corporation alleges that there are defects in the building's structural elements and in its hydraulic, mechanical and electrical services, waterproofing, balustrades and coatings. 5. On 16 October 2015, the Owners Corporation obtained judgment against Nazero for $1,452,419.32. 6. As between the Owners Corporation and Iris, the following matters are now common ground: 1. ss18C and 18D of the Home Building Act 1989 (NSW) ("the Act") entitles the Owners Corporation to the benefit of statutory warranties referred to in s18B of the Act owed by Nazero and Iris; 2. the common property of the block suffers from the defects to which I have referred; 3. those defects must be rectified by the methods identified in expert evidence adduced on behalf of the Owners Corporation; 4. the defects have been particularised in a Scott Schedule dated 7 July 2015; 5. the presence of the defects bespeaks a breach of the statutory warranties; and 6. Iris is liable to the Owners Corporation in an amount reflecting the reasonable cost of rectifying the defects. 1. The remaining issue is quantification of that cost. 2. Before dealing with the substance of the matter, I will deal with a procedural question that arose at the outset of the hearing. Iris's application for leave to rely on the report of Mr David Madden 1. The Owners Corporation's case relies upon a report prepared by its quantity surveyor, Mr George Zakos. 2. By notice of motion dated 15 August 2017 and returnable before me at the commencement of the hearing on 21 August 2017, Iris sought an order pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 31.28(3) that it have leave to adduce evidence from another quantity surveyor, Mr David Madden, in accordance with the report prepared by him dated 1 November 2016. 3. At the outset of the hearing, on 21 August 2017, I granted Iris that leave. 4. I said that I would give my reasons in this judgment. 5. These are those reasons. Background to the service of Mr Madden's report 1. The Owners Corporation served Mr Zakos's report on 1 July 2015. 2. On 1 December 2015, Iris, by its solicitor, informed the Owners Corporation that it did not propose to adduce any evidence. 3. 18 February 2016, Iris served a cross-claim on Mr Younan, seeking a declaration that Mr Younan was liable to rectify the defects in the building or, alternatively, liable to pay to Iris any amount that the Owners Corporation may be held entitled to recover from Iris. 4. On 1 November 2016, Mr Younan served Mr Madden's report. 5. On 24 February 2017, the matter was listed for hearing commencing 21 August 2017. 6. On 23 March 2017, Mr Zakos and Mr Madden participated in a conclave. 7. On 4 April 2017, Mr Zakos and Mr Madden produced a joint report (setting out their areas of agreement and disagreement) as well as a draft agenda for the hearing of concurrent evidence at the hearing. 8. On 4 August 2017 (a little over two weeks before the commencement of the hearing) Mr Younan's solicitors informed Iris's solicitors that Mr Younan did not propose to tender Mr Madden's report. 9. Iris's solicitor gave unchallenged evidence that: "Before I received [that communication] I understood that at the trial [Mr Younan] would be relying on all evidence that he had served." 1. Accordingly, on 4 August 2017, Iris's solicitors wrote to the Owners Corporation's solicitors, requesting that Mr Madden's report be included in the Court Book as "Iris may tender and rely on the same". 2. On 11 August 2017, Iris confirmed that it would seek to rely on Mr Madden's report. 3. On 17 August 2017, Iris formally served Mr Madden's report on the Owners Corporation. 4. In the meantime, on 15 August 2017, Iris filed its notice of motion seeking leave to rely upon Mr Madden's report. 5. On the same day, 15 August 2017, Iris and Mr Younan settled on the basis that Iris's cross-claim against Mr Younan be dismissed. Disposition 1. In those circumstances, I was satisfied that Iris had demonstrated the existence of "exceptional circumstances" for the purposes of UCPR r 31.28(4) warranting the granting of leave for it to rely upon Mr Madden's report. 2. I am satisfied that, as Iris's solicitor deposed, Iris had assumed (until 4 August 2017) that Mr Younan would call Mr Madden at the hearing and that his evidence would be available to contradict the evidence of Mr Zakos. 3. After all, Mr Madden and Mr Zakos had participated in a conclave and had produced a joint report, clearly in anticipation that they would give concurrent evidence at the hearing. 4. In those circumstances, I was satisfied, as was submitted by Mr McGrath SC, who appeared for Iris, that the Owners Corporation had no reason to doubt that Mr Younan would tender the report of Mr Madden or to believe that Mr Madden's report would not be part of the evidence in the proceedings. 5. Mr Cheney SC, who appeared with Mr Chiu for the Owners Corporation, submitted that I should infer that Iris had made a "calculated decision" not to serve evidence from a quantity surveyor in order that it might quarantine itself from any adverse consequences of adducing expert evidence. 6. Although that may be so, I do not think that it affects the conclusion that, in the events that have happened in the past few weeks, "exceptional circumstances" have occurred, such as to warrant the granting of leave. 7. Very properly, Mr Cheney did not suggest that his client was prejudiced by Iris's relatively belated decision to rely upon Mr Madden's report. 8. My attention was drawn by Mr Cheney to the decision of the Court of Appeal in Cummins Generator Technologies Germany GmbH v Johnson Controls Australia Pty Ltd [2015] NSWCA 264. In that case, the Court of Appeal (Beazley P, with whom Gleeson and Leeming JJA agreed) refused to interfere with the decision by McDougall J that, in the circumstances of that case, "exceptional circumstances" were not established merely because a party had abandoned part of its case at trial and decided, during the course of the trial, not to call certain evidence. 9. I saw this case as being distinguishable from that in Cummins Generator. First, unlike the party in the corresponding position to Iris in Cummins, Iris has served Mr Madden's report. Second, unlike the situation in Cummins, Mr Madden has not relied upon other expert reports which did not go into evidence. The matters in dispute 1. In the result, Mr Zakos and Mr Madden gave their evidence concurrently and, with the assistance of counsel, with commendable succinctness and efficiency. I was greatly assisted by the highly professional approach both witnesses brought to the task. 2. At the conclusion of the concurrent evidence, the Owners Corporation's claim for the reasonable cost of rectifying the defects in the buildings was $1,173,909 comprising various trade costs totalling $734,221 and various add on-costs totalling $439,688 as summarised in the following table: 1. Waterproofing & building defects $279,621 2. Coating defects $224,805 3. Hydraulic defects $68,150 4. Mechanical, fire & electrical defects $115,080 5. Structural defects $46,565 Subtotal – Net Trade Cost $734,221 Add on-costs: Preliminaries (14%) $102,791 Profit & Overhead (25%) $209,253 Design and Documentation (agreed 2%) $20,925 Contingency (agreed 5%) and Contract Administration (agreed 5%) $106,719 Subtotal-On-Costs $439,688 TOTAL (exclusive of GST) $1,173,909 1. The costs of rectifying many of the defects in the building are now agreed. 2. What remains for decision is: 1. the reasonable costs of replacing defective waterproof membranes on the balconies of certain of the units; 2. the reasonable costs of replacing all of the balustrades in the building; 3. the appropriate amount to allow for preliminaries; 4. the appropriate amount to allow for profit and overhead; and 5. the appropriate global basis to be fixed between the opinions of Mr Zakos and Mr Madden in relation to thirty-nine individual net trade items (the individual value of each of which is not large). The parties agree that, once I have made a decision about each of those matters, they can perform a calculation as to the net sum payable by Iris to the Owners Corporation. 1. Each of Mr Zakos and Mr Madden made their estimates by reference to Rawlinsons Australian Construction Handbook 2015. Rawlinsons sets out costings as at 31 December 2014. 2. It is agreed that once a final figure is determined, an allowance must be made to take into account cost increases since 31 December 2014. Mr Zakos and Mr Madden agree those cost increases to be in the order of between 3 per cent and 5 per cent. I propose to adopt the figure of 5 per cent. 3. It is also agreed that questions of costs and interests on costs should be considered after publication of these reasons. 4. I will now deal with the remaining matters in dispute. Balcony waterproofing 1. Mr Zakos estimated the reasonable costs of repairing the waterproofing to the balconies to be $114,134.75; Mr Madden's estimate is $70,028.50; a difference of $44,106.25. 2. The steps taken to rectify the balcony waterproofing problems were set out in a report prepared by Mr Eric Byrne, an accredited building consultant. 3. In that report, Mr Byrne set out in detail the steps that he advised should be taken to rectify the problem. 4. During the concurrent evidence, the focus of the dispute was on a number of items that, despite Mr Byrne's recommendation, Mr Madden opined were not required. 5. In final submissions, Iris accepted that those items (together with item 15.15) should be resolved in the Owners Corporation's favour. 6. The parties agree that the remaining items (15.7, 15.8, 15.12. 15.19, 15.27, 15.28, 15.29, 15.35, 15.39, 15.40, 15.47, 15.50, 15.52, 15.53 and 15.54) should be dealt with on the "global" basis referred to at [40(e)] and which I deal with below. Replacement of balustrades 1. Mr Zakos expressed the opinion that the reasonable cost of supplying and installing the replacement balustrades was $157,395; Mr Madden, $81,900; a difference of $74,495. 2. The steps needed to rectify the balustrades are set forth in a report prepared by Dr Stuart Bayliss, a metallurgist. 3. The differences between Mr Zakos and Mr Madden related primarily to the reasonable cost of supply of the steel balustrade and as to the reasonable cost of coating the steel components on the balustrade. The steel in the balustrades 1. As to the reasonable cost of supply of the steel balustrades, the difference between Mr Zakos and Mr Madden arises principally because Mr Zakos based his estimate on that part of the Rawlinsons Handbook which deals with "Glazed Balustrades", whereas Mr Madden based his costings on the part that deals with structural steelwork generally. 2. As the balustrades in question are glazed, it appears to me that the "Glazed Balustrades" costings are those which are appropriate. 3. Rawlinsons states that the rate for a polished stainless steel balustrade with a standard 6mm toughened glass set in channel at base is $870 per metre; to which there should be added $370 per metre where 12mm tinted, toughened glass is used: making a total of $1,240 per metre. 4. Because of the bespoke nature of the balustrades in question, including the incorporation of what the parties described as "louvres" (which were attached to the roof and which could be used to fully enclose the balcony) Mr Zakos opined that the figure should be rounded up to $1,500 per metre. That costing appears to me to be reasonable and I propose to adopt it. Coating the balustrades 1. In relation to the reasonable costs of coating the steel components on the balustrade, Mr Zakos allowed $500 per metre whereas Mr Madden allowed only $69.30 per metre. 2. Mr Zakos drew attention to the detailed methodology prescribed by Dr Bayliss in his report for the costs of cutting the steel components. 3. The methodology required dry abrasive glass cleaning, then hot dip galvanising, then light blast cleaning, then an epoxy primer coat and then three coats of polyurethane paint. Then the Bayliss methodology required, after installation, a fresh water wash down and recoating, with all of those four coats, for any areas damaged in the transport and installation process. 4. Mr Zakos explained that this exhaustive coating process was needed on this building because of its close proximity to Clovelly beach. 5. On the other hand, I was not able to understand how Mr Madden's estimate of $69.30 per metre took into account the detailed process called for by Dr Bayliss. As was submitted on behalf of the Owners Corporation, given that process causes some six separate treatments before installation, it is hard to see how Mr Madden's rate is a realistic costing of the process. 6. One matter that Dr Bayliss specified was that glass infill panels and operable glass panels on the balconies be removed during the dismantling of the balustrades and then reused. Mr Zakos's costings assumed that the glass panels were replaced with new panels. Mr Zakos accepted that his methodology departed from that prescribed by Dr Bayliss and that it added some $60 per metre to the overall cost. 7. Taking that into account, I propose to deduct that figure from Mr Zakos's total figures. 8. Thus, I will allow the Owners Corporation Mr Zakos's figure of $1,500 per metre for the supply of steel, $500 per metre for the cost of coating, less the $60 per metre occasioned by Mr Zakos's assumed replacement of the glass. Preliminaries 1. There was very little difference between Mr Zakos and Mr Madden as to the figure that should be allowed for preliminaries. 2. Mr Zakos proposed 14 per cent and Mr Madden 13.5 per cent. 3. The matter that divided the experts was the extent to which the cost of scaffolding was already been taken into account elsewhere in the costings. 4. The difference between the experts is very small: 0.5 per cent (which amounts to some $4,500). 5. Further, Mr Madden adopted Mr Zakos's figure of 14 per cent in his report. 6. I propose to allow preliminaries at that figure. Profit and overhead 1. Mr Zakos adopted a figure of 25 per cent for profit and overhead whereas Mr Madden adopted a figure of 10 per cent. 2. The difference between the experts came down to their differing assessments of what level of profit a builder would expect to achieve performing rectification work (rather than new work) of defects that had already been the subject of scrutiny in proceedings in this court. 3. Mr Zakos accepted that his proposed margin of 25 per cent was at the high end of the range and that the usual range for new work was between 5 per cent and 10 per cent. 4. It was also not clear to what extent Mr Zakos had taken into account the effect of competitive pressure in the current Sydney market. Mr Zakos agreed that the market for remedial building work in Sydney was "booming". 5. Further, Mr Zakos said that the likely duration of the works would be between six to eight months and that it was likely that any builder who agreed to do the work would agree to do it concurrently with other jobs and, to some extent, intermittently. 6. Overall, I have concluded that the appropriate figure to allow for profit and overhead is 17.5 per cent. The remaining items in dispute 1. Both parties agreed that, in view of the relatively small amount involved in each of the remaining items, a global approach was called for. 2. The differences of opinion between Mr Zakos and Mr Madden revealed that professional minds can reasonably differ. 3. The differences between Mr Zakos and Mr Madden were mostly attributable to: 1. minor differences in the number of hours each has allowed for the performance of numerous individual sub-items of rectification works; 2. minor differences in the rates applied for sourcing materials or specialist services; and 3. whether particular sub-items, for example, the preparation of dilapidation reports for hydraulics rectification, should form part of preliminaries and should be costed as a net trade cost. 1. As the Owners Corporation pointed out, and Iris accepted, both experts were attempting to forecast the likely competitively tendered price in which the Owners Corporation would ultimately contract with the builder (for example, see The Owners Strata Plan no 66375 v Suncorp Metway Insurance Ltd (No 2) [2017] NSWSC 739 [92]-[93] (Ball J)). 2. Of course, nobody has perfect knowledge of the market at any given point in time; there must be an element of speculation in the opinions of each expert. 3. Iris contended that the Court should adopt the midpoint between the views expressed by Mr Zakos and Mr Madden in relation to those items. 4. As Iris pointed out, both Mr Zakos and Mr Madden are deeply experienced in this area, and both approached their tasks (preparation of their reports, participation in the conclave, creation of the joint report and their participation in the concurrent evidence before me) in an efficient and professional manner. 5. However, this is a case where the defects in respect of which the experts have expressed opinions are ones for which Iris is responsible. 6. In that regard, my attention was drawn to the observations of Handley JA (with whom Mason P and Beazley JA agreed) in Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 59: "[T]he Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party 'whose actions have made an accurate determination so problematic'". 1. My attention was also drawn to the observations of Giles JA (with whom Macfarlan and Young JJA agreed) in McCartney v Orica Investments Pty Ltd [2011] NSWCA 337 at [158]: "Where within the proved case there is a range … the wrongdoer can hardly complain if the loss is found at the upper end of the range". 1. I was not invited to, and do not propose to, look at each of the individual items in respect of which a global assessment is to be made. 2. However, taking into account the principles referred to in these authorities, I propose to allow each of these items at 75 per cent of the figure the subject of Mr Zakos's opinion. 3. I understand that the total amount in dispute for these items is $61,246 to which there must be added on costs in the range that I have determined or which are agreed. 4. I propose to allow the Owners Corporation 75 per cent of that total figure. Conclusion 1. I invite the parties to confer and agree on the arithmetical consequences of these conclusions (which of course will also take into account the matters which are no longer in dispute). 2. I will hear the parties concerning the final orders to be made and as to costs. ******** 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: 29 August 2017