The Owners – Strata Plan 99960 v SPS Building Contractors Pty Ltd [2024] NSWSC 687

Andrew Hales  |  Sophie Wallwork  |  Emily Miers

Key takeouts

• The NSW Supreme Court has sent a clear message to owners corporations contemplating systemic defect claims.
• The standard set in The Owners – Strata Plan No 62930 v Kell & Rigby Holdings Pty Ltd [2010] NSWSC 612 for inferring a systemic defect stands firm. 
• On the specific facts and circumstances of each case detailed, case-specific testing and investigation is required, and this may necessitate extensive inspections and testing of each lot to substantiate the existence of a systemic defect. 
• Damages cannot be awarded on the basis of a ‘risk’ of a breach which, if realised, would lead to a risk of damage.

Facts

The plaintiff, The Owners – Strata Plan 99960 (owners corporation) commenced proceedings against SPS Building Contractors Pty Ltd (builder) alleging various defects in the construction of 45 townhouses in Tweed Heads (development).  A final occupation certificate was issued in relation to the development in August 2019.  From November 2019, the owners corporation received complaints related to water ingress, prompting the commencement of proceedings in August 2021.

The court heard the proceedings over eight days in May 2024 to determine liability. The assessment of damages was deferred to a costs expert due to the delayed provision of cost-related evidence.

At hearing, the court sought to clarify the following issues:

• the substantiation of 50 alleged defects which remained in dispute;
• the extent of necessary rectification work where there was no consensus by the parties’ experts; and
• the nature of the alleged damage and rectification work required to individually owned lots rather than common property, and whether the owners corporation was entitled to claim the costs for such work.

The central issue in dispute was the alleged ‘Systemic Defect SD2‘, which concerned 26 townhouses alleged to have:

• defects in the waterproofing of each of the rear first floor balconies;
• defects in the waterproofing of each of the front first floor balconies, at the inner edge beneath the balcony doors; and
• defects in the waterproofing detail at the outer edge of the front first-floor balconies, which had caused damage to structural Laminated Veneer Lumber (LVL) beams (LVL defect).

The owners corporation’s and builder’s experts agreed to the existence of the defects referred to at (a) and (b) above in respect of all 26 townhouses featuring first-floor balconies.  The existence of the LVL defect was only agreed in respect of 2 of those 26 townhouses (numbers 25 and 27).  The builder disputed the existence of the LVL defect for the remaining 24 townhouses.

The builder, relying on Ward J’s decision in The Owners – Strata Plan No 62930 v Kell & Rigby Holdings Pty Ltd [2010] NSWSC 612 (Kell & Rigby), argued that defects in a sample do not automatically indicate a systemic issue.  That is, the existence of the LVL defect in townhouses 25 and 27 did not automatically warrant a systemic defect ruling for all townhouses, particularly as destructive testing (to establish the LVL defect) was only conducted on townhouses 25 and 27.

The owners corporation’s expert maintained that the court was justified in making a systemic finding, given the assumption that the construction of the balconies was uniform throughout the development.

In Kell & Rigby, the absence of water-stops in the bathrooms of a 14-unit block was examined through destructive testing in just three units.  Ward J concluded that it could not be inferred that the waterproofing work was deficient in the remaining units based on the evidence from the three bathrooms, stating ‘the fact that the subcontractor defectively performed work in a small number of units does not warrant a conclusion that it did so everywhere else’.

In circumstances where the burden of proof lay on the owners corporation and that it had chosen to carry out limited destructive testing in three bathrooms, and that there was no apparent reason why it could not have done so in all of the units, Ward J did not support a systemic defect finding.

This stance was echoed by Ball J in The Owners – Strata Plan No 66375 v Suncorp Metway Insurance Ltd (No 2) [2017] NSWSC 739 which referenced Ward J’s judgment in Kell & Rigby and highlighted that on those facts, his Honour was not satisfied that the identified defect was present in all bathrooms, including those that had not been inspected. This underscores the necessity for the court to consider each case based on its specific circumstances.

The builder also argued that any damage to carpet which had been caused by water ingress as a result of ‘Systemic Defect SD2’ was not damage to common property, but to lot property.

Decision  

LVL defect

The court dismissed the owners corporation’s claim that the LVL defect was systemic.

Attention was drawn to the initial expert report commissioned by the owners corporation, which explicitly recommended further evaluation of the structural LVL beams across all townhouses to ascertain the location and extent of any moisture damage associated with the potential LVL defects.

The court did not concur with the owners corporation’s argument for a systemic ruling based on the presumed uniformity of the construction methods applied to all balconies, particularly in the absence of a clearly determined cause for the LVL defect, ie whether it be a flaw in design or workmanship.

The court concluded that without evidence explaining the specific reasons for the inadequate waterproofing at the edge of the first-floor front balconies of townhouses 25 and 27, it would be speculative to presume that the same issue exists in the remaining 24 townhouses that had not undergone similar investigation.

The court rejected the owners corporation’s claim that it was not unreasonable to rectify the LVL beams at the outer edges of all 26 townhouses given the risk that their failure could have catastrophic consequences.  The court quickly refuted this line of reasoning, stating ‘if no defect has been established, then no breach has been established… Damages cannot be awarded on the basis of a ‘risk’ of a breach which, if realised, would lead to a risk of damage’.  

This rationale also underpinned the court’s decision to reject the owners corporation’s proposal that a cost expert should account for the potential discovery of the LVL defect in other townhouses during rectification works and that a provisional sum should be allowed for ‘the cost of investigating and replacing 75% of the LVLs that are part of SD2’.  The court held that ‘first and fundamentally, unless breach is established, there is no basis for awarding damages for rectification work (whether by way of a provisional sum or otherwise).  Secondly, on the current state of the evidence, there was no evidentiary basis for determining the amount of the proposed provisional sum’.

Common property or lot property?

 Based on the evidence there was a sufficient basis to infer that the carpet in the affected townhouses was likely installed before the date of registration of the strata plan and was therefore common property.

That decision was based on section 6 of the Strata Schemes Development Act 2015 (NSW) and the decision in The Owners SP 35042 v Seiwa Australia Pty Ltd [2007] NSWCA 272, in which it was held that the ‘upper surface of the floor’ fixes the lower ‘horizontal boundary’ of the lot ‘as at the date of the registration of the strata plan’ and, therefore, ‘if at the date of registration a tile or timber floor has been laid over and affixed to the concrete slab, then the boundary will be the upper surface of the tiles or timber flooring’.