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BUILDING DEFECTS AND IMPLIED STATUTORY WARRANTIES

Introduction

A recent court case has resulted in the New South Wales State Government moving to amend an oversight in its Home Building Act 1989 (NSW) (“HBA”), which ultimately blocked an owners corporation from bringing claims pursuant to the statutory warranties contained in the HBA despite a clear breach of these warranties on the part of the builders.

Background of the Case

Ace Woollahra Pty Ltd v The Owners Strata Plan 61424 (2010) NSW CA 101 (“Ace Woollahra”) involved a joint venture arrangement between the registered proprietor of a site in Woollahra (“the Owner”) and a property developer (“the Developer”) to build 30 residential aged persons units on the Woollahra site. The Developer subsequently engaged a construction company to design and construct the units, who eventually terminated the contract. At that time a second company (“the Builder”) agreed to be bound by the same terms and conditions of the first contract and complete the job. The contract used for both builders clearly expressed the inclusion of statutory warranties in the Contract.

Around the same time that the project was finished, Strata Plan 61424 was registered and the common property vested with the newly created owners corporation. The owners corporation subsequently found a range of defects within the common property and commenced proceedings against the builders for breach of the statutory warranties listed under s18B of the HBA.

Decision

The New South Wales Court of Appeal looked to two relevant sections of the HBA, s18D and s99, both of which relate to the transfer of the entitlement to statutory warranties from those who were part of the original contract to those “on whose behalf” the work is being done.

The Court found that the legislative intent was that the statutory warranties would only apply to those who were part of the original contract and their successors in title. It was noted that if statutory warranties were to extend to all those parties “on whose behalf” the work was being done, then this would be a disproportionately large group of people.

Therefore, it was ultimately held that because the owners corporation was not a party to the original building contract with the builder, nor was it a direct successor in title (due to the fact that the Owner was not party to the original contract), the owners corporation could not bring an action pursuant to s18D or s99 of the HBA.

Changes to the Act

In response to the decision in Ace Woollahra, the NSW government introduced the Home Building Amendment (Warranties and Insurance) Act 2010 (NSW) (“HBAA”). The effect of the HBAA is to amend the HBA to ensure that purchasers who may not have been part of the original contract with builders can now be classed as being persons “on whose behalf” the building was done.

The HBAA also applies retrospectively to any construction contract made after 1 May 1997. This means that in contrast to the decision in Ace Woollahra, an owners corporation whose common property was developed after 1 May 1997 is now classed as a party “on whose behalf” the building work was done, and thus would be entitled to the same statutory warranties that they would have been entitled to as parties to an original contract.

The Victorian Approach

Victoria appears to take a broader and more liberal approach in respect of the applicability of statutory warranties from the outset. The implied statutory warranties are contained in s8 of the Domestic Building Contracts Act 1995 (Vic) (“DBCA”). Section 9 of the DBCA is outlined below and seems to adopt a catch all approach enabling all subsequent owners to receive the protections of the statutory warranties:

“9. Warranties to run with the building

In addition to the building owner who was a party to a domestic building contract, any person who is the owner for the time being of the building or land in respect of which the domestic building work was carried out under the contract may take proceedings for a breach of any of the warranties listed in section 8 as if that person was a party to the contract.”

It is apparent that Victoria’s DBCA goes much further than the New South Wales HBA by putting all subsequent owners in the position as if that person was a party to the contract and therefore clearly intends to avoid the type of result seen in Ace Woollahra.

Nonetheless, despite the breadth of the scope and application of the statutory warranties in domestic building in Victoria, VCAT has held that statutory warranties can only run with the land and be enforced in contracts which have been entered after the commencement of the DBCA. In Body Corporate Plan No- PS340350Y v JMC Residential Pty Ltd, Senior Member R Walker held in obiter that a contract which was formed prior to the operation of the DBCA which contained similar warranties to those contained in s8 of the DBCA does not enjoy the operation of s9 and run with the land. In this situation, the ordinary principles of privity of contract would apply and the subsequent owners, including the owners corporation in that case, could not rely on the statutory warranties.

Owners corporations and their managers often face difficulties when seeking relief for building defects. Legal advice should be sort where it is unclear whether the building contract is a domestic building contract or where the application of statutory warranties is subject to question.

Should you have any comments in relation to this article or require assistance with building defects or implied statutory warranties in relation to your owners corporations, please do not hesitate to contact Jenny Wang or Lindsay Crofton of Berrigan Doube Lawyers on (03) 9600 2577.