Building defects: High Court decision
05 Nov 2014
Those of you who get industry updates may have seen that the High Court of Australia recently found that the builder of an apartment building was not liable in negligence to the Owners Corporation (the New South Wales version of a body corporate) for latent construction defects in the building.
Even though it was based on a building in a New South Wales, the general principles that were decided in the case are relevant to all states in Australia.
The decision is significant as it removes one potential string from the bow of a body corporate to bring building defect claims against a developer. However, it is not as catastrophic to a legal action for building defects as some would have you believe.
We say that because the decision affects only one of the causes of actions a body corporate can bring to address defects. Some examples of different actions are:
- Breach of contract – the body corporate gets the benefit of developer’s rights under any contracts for building or development work carried out on the scheme land, so can sue for breach of contract (i.e. you did not build the product to the standard required under the contract).
- Negligence – the builder owed a duty of care to exercise due care and skill in their work and that duty was breached when the building started leaking (this is the action affected by this High Court decision).
- Misleading and deceptive conduct – the developer / builder / supplier / manufacturer made misleading and deceptive representations about the quality of the building works or material.
The High Court decision will not adversely affect the main cause of action (breach of contract), but it will increase the amount of care and attention it gets in the future.
So why did the High Court come to this conclusion? Well, there are 67 pages of reasons explaining that but in essence our take away is that the case turned on the need for a claimant (i.e. the owners corporation) to demonstrate that it was vulnerable to a builder’s negligence. That is, the owners corporation had to demonstrate that it could not protect itself from the consequences of defective building work.
One of the reasons that went against the Owners Corporation was that its members (i.e. the lot owners) had the opportunity to protect themselves when entering into off-the-plan contracts to purchase. No-one forced them to enter into the purchase contracts and if they were concerned about the possibility of building defects, they could have carried out a thorough inspection of the building or even negotiated greater warranties against defects before they settled.
That type of reasoning may be over-estimating the bargaining power and sophistication of your average purchaser of an off-the-plan unit as against a large and well-established developer. The position is coloured a fraction by the fact that the purchasers of lots were buying lots in a serviced apartment hotel venture as an investment, and as such weren’t going to actually reside in them. This may be something that may be looked at differently if a residential only building brought a similar claim – but any claim would now be swimming against the tide based on this decision.
Interestingly, however, the other Owners Corporation in the same building (the residential body corporate) settled their claim against the builder based on New South Wales-specific statutory warranties for residential building work. This position changes state by state based on what the statutory insurance framework is.
If you want to protect yourself (as a lot owner / committee member) or the scheme you manage (as a body corporate manager), the best thing you can do right now is:
- Start looking at your body corporate records to see whether the developer (original owner) handed over all contracts for building and development work carried out on the land.
The Body Corporate and Community Management Act 1997 obliges the developer to hand over these documents to the body corporate at the first Annual General Meeting (AGM). Check the minutes of the first AGM to start the trail. You will likely see a bare acknowledgement that some records were handed over or even the developer’s representative tabling an undertaking to give these documents at some later point.
- Engage qualified experts to not only inspect the scheme for defects, but also to estimate the rectification costs (so you know what you may be fighting for).
We can help any committees on a no obligation and very cost effective basis if needed to help determine these threshold issues.
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we strive to provide accurate and timely information, we do not guarantee that the information contained within this article is accurate at the date it is published/received or that it will continue to be accurate in the future. Hynes Legal are not responsible for the information of any source to which a link is provided or to which reference is made and exclude all liability connected with use of these sources.