January 2007

Case law: warranties under the Home Building Act

As of 1 May 1997 the Home Building Act radically changed the regulation of residential building in NSW. Amongst other provisions it introduced warranties as to the standard of workmanship etc which are implied in every residential building contract, extended the liability for breach of those warranties to developers and enabled successors in title to enforce the statutory warranties against the builder and/or the developer.

A number of cases have dealt with the way in which these provisions work in practice. Until recently however no judicial pronouncement had been made in relation to the following questions:

  • If a defect which amounts to a breach of the statutory warranties is rectified, does the seven year period for commencement of proceedings to remedy a breach of a statutory warranty start again from the date of rectification?

  • Is rectification of work originally carried out pursuant to a contract entered into before 1 May 1997 subject to the Home Building Act where the rectification work is undertaken after 1 May 1997?

  • Is a successor in title to a person who fits within the definition of "developer" entitled to the benefit of the statutory warranties against the developer even though the relevant work was originally done before 1 May 1997.

The Consumer Trader and Tenancy Tribunal has now provided answers (Owners Corporation Strata Plan 51732 v Platino P/L & Anor).

The facts

A developer entered into a joint venture with a builder to refurbish and convert a warehouse building in Sydney to residential accommodation. The joint venture was entered into in 1994 and the work was completed in 1995 when a nine lot strata scheme was registered. The lots were all sold well before 1 May 1997. After the introduction of the Home Building Act, complaints of defects said to arise from the refurbishment work were made to the developer by individual owners and the Owners Corporation.

By this time the principal of the builder was semi-retired owing to ill health and was absent overseas for long periods. Due to the long and harmonious relationship between the developer and builder, in 1998 the developer arranged for some remedial work to be undertaken on behalf of the builder and engaged in most of the direct contact with the Owners Corporation and individual owners.

The owners were dissatisfied with the remedial work, and commenced proceedings in 2004 against both the developer and the builder. The cause of action was said to arise from the 1998 work, since it was by then too late to sue in relation to the 1994/1995 work. Also, the legislation which existed prior to the Home Building Act gave no cause of action against developers.

The Owners Corporation argued before the Tribunal that the 1998 work was performed by the developer and/or the builder under a new contract, the consideration for which (if needed) was forbearance from commencing proceedings against them. The statutory warranties therefore applied to the work and the Owner's Corporation had seven years from 1998 to enforce them.

In reply, on behalf of the developer it was submitted that:

  • The developer had acted at all times as agent for the builder in arranging the 1998 work, so that the developer was not a party to any contract and did no residential building work itself.

  • The 1998 work was done under the 1994 contract, which remained incomplete until any defects were rectified, so that the Home Building Act was inapplicable.

  • No claim could be made against the developer under the Home Building Act since at the time the 1998 work was done, it was no longer a developer within the meaning of the Home Building Act.

The outcome

The Tribunal held for the developer and builder. It found that as a matter of fact:

  • The 1998 works were organised by the developer as agent for the builder.

  • The 1998 works were done under the original 1994 contract which was not completely spent when the building was occupied in 1995 ? the builder had obligations under the 1994 contract which continued whilst ever it had a liability to make good defective work.

  • There was consideration for a new contract (presumably because whilst there were complaints there was no threat to commence proceedings).

The findings of fact led the Tribunal to the conclusion that:

  • The work done in 1998 was covered by the legislation governing building contracts entered into in 1994, and not the Home Building Act.

  • The operation of the Home Building Act is not retrospective, so that although it was a developer in 1994, the developer did not have that status in 1998 and was not subject to the Home Building Act.

  • As disclosed agent for the builder, the developer did no building work itself and so was not liable for any of the Home Building Act warranties.

The Tribunal also held that remedial work done by the original builder pursuant to a building contract covered by the Home Building Act does not attract the operation of Part 2C of the Home Building Act or provide a further seven years in which to enforce the statutory warranties. The Tribunal said:

"If as a matter of statutory interpretation such a construction were open it could lead to an open-ended warranty if the defect recurred towards the end of each warranty period. The problem is that the legislation has, in section 18E, selected a finite term of seven years for the soundness of building works. To select the interpretation advanced on behalf of the applicant from among those available would negate what Parliament clearly intended."

No appeal from the Tribunal's decision was filed. Whether the Supreme Court will adopt the Tribunal's reasoning and determination in the future is yet to be seen.

On a practical level, the decision means that it is in an owner's interest to have defective residential building work rectified by a new contractor, or to enter into a fresh contract for the rectification work, so as to obtain the benefit of a further seven years in which to bring a claim in relation to the defect in question.