March 2003

Good news for builders in NSW? - Office of Home Building - to avoid litigation

A recent decision of the Court of Appeal of NSW and the enactment of legislation making further changes to the home building regime in New South Wales gives builders some hope of being able to stay away from expensive litigation.

No extension of liability

The landmark 1995 High Court case of Bryan v Maloney imposed a liability for negligence on builders in favour of subsequent purchasers. The case held that builders of both residential and commercial buildings can be sued for economic loss arising from defective work, not just by the person who contracted with them to construct the building, but also those who buy the property at a later date, even though they have probably never met or had any form of contact with the builder.

The Home Building Act has since May 1997 given this extension of liability statutory force in New South Wales in relation to residential building work. The Home Building Act does not however apply to commercial building.

On its facts, Bryan v Maloney widened the scope of damage for pure economic loss to embrace defects which are both structural and latent. Later cases have suggested that the principle might be extended still further to encompass other types of defects, in particular, non-structural defects. An affected proprietor can bring an action under Bryan v Maloney at any time within 6 years after the defect becomes apparent.

In Goulding v Kirby (decided on 9 December 2002) the appellant owners brought a claim against a painter. They alleged that the painter was negligent in having painted the internal walls of their house without properly preparing the surfaces and then subsequently applying a water based paint which did not sufficiently adhere to the pre-existing oil based paint. The painting had been done before the appellants purchased the house, pursuant to a contract with the previous owner. The appellants sued for the cost of rectification, said to be between $40,000 and $64,000.

Whilst there was some debate in the case as to whether the defect was able to be discovered on a reasonable inspection (the appellants said that they did not notice that the paint had started to peel and had little resistance to impact or scratching until after they had moved into the house) the defect was certainly not structural. The Court also made note of the fact that one of the appellants was an architect and principal of a building firm and therefore was not a vulnerable, unsophisticated purchaser.

The Court of Appeal recognised that to give the appellants a remedy in the circumstances would be to extend Bryan v Maloney beyond structural defects or defects which have a potential to become such, being defects which are latent and not such as could reasonably be discovered by inspection. The Court of Appeal refused to do so and said that it is primarily for the High Court to consider whether to extend Bryan v Maloney outside the realm of structural latent defects. In particular, they refused to consider an extension to cover negligently effected painting when it had at best been a cosmetic function and was originally done at a relatively modest cost.

Commercial builders in New South Wales can take some comfort from this decision and be confident in resisting non-contractual claims for defects which are not both latent and structural - at least until the High Court says otherwise.

Back to the future?

The enactment of the Home Building Act in May 1997 was a watershed in the regime of regulation of home building in New South Wales. Significantly it replaced the Building Services Corporation Scheme by which the Government insured residential building against defective workmanship up to set limits with a scheme of private insurance. Even that private insurance was wound back in July 2002 so that a claim can only be made by a home owner against his or her insurance policy if the builder is insolvent, dead or has disappeared.

The practical effect of this is to push both home owners and builders straight to litigation in the Consumer Trader & Tenancy Tribunal or a Court if an allegation of defective work is raised.

This was generally not the case under the BSC Scheme where usually the complainants first action was to report the alleged defect to the BSC. The BSC would then send an inspector out to view the work, discuss matters with the parties and, to the extent the inspector felt the claim was justified, direct the builder to undertake rectification. If the builder failed to comply with the direction, then apart from being subject to disciplinary action the builder would be liable to the BSC for the cost of repairs (undertaken by another contractor at the behest of the BSC).

It is the general view of builders that most claims, spurious or otherwise, were kept away from litigation to the benefit of all concerned.

In December 2002 the New South Wales Government announced the creation of the Office of Home Building. One of the functions of the Office of Home Building will be to provide an inspector to conduct an investigation upon receipt of notice of a dispute concerning residential building work. A claim cannot be lodged with the Consumer Trader & Tenancy Tribunal until such an investigation has been carried out, other than in exceptional circumstances.

The inspector from the OHB may make an order requiring specified work to be done in order to rectify and complete all defective work. Failure to comply with the requirements of a rectification order will result in disciplinary action against the contractor concerned. The inspector can impose conditions on the rectification order, such as that the complainant pay a progress claim which is due.

The similarities with the old BSC Scheme are obvious. A newly appointed general manager of the OHB has confirmed that it is his intention that the role of inspectors will be to try, as far as possible, to conciliate any dispute and achieve a consensual determination, thus insulating the parties from the delays and expense inherent in litigation.

Whist the OHB does not have the power to arrange for the work to be carried out if the builder refuses to comply with the rectification order (the owner is left to his or her own devices and must claim compensation through the Consumer Trader & Tenancy Tribunal or the Courts) it is hoped that the threat of disciplinary action will avoid the need to do so.

Whilst the legislation to effect these changes has been passed by the New South Wales Parliament, there are still regulations to write, etc, and it is expected that the new system will commence on 1 July 2003.