Introduction
1. This paper is presented to give you some guidance on building defect claims which you may encounter from time to time and how the Home Building Act (NSW) 1989 (“HBA”) applies to a building defect claim for residential building work. A building defect claim (“the claim”) can be a complex and difficult claim to manage particularly with the strict time limits that operate in relation to it.
2. We have noticed that people have had some difficulties in understanding how the process works. In particular lot owners’ in a scheme are often confused about the process and the length of time that it takes to resolve a claim. Each claim will be different to the other although it will have some similarity.
3. As strata managers it is extremely important that you understand your role in the process and what you need to do to assist in the processing of a successful claim.
What is a Building Defect?
1. Building Defect/s does not have a specific meaning. Unfortunately the HBA does not define building defect which would have been helpful.
2. In such circumstances, I would prefer if we understood the term “building defect” in its ordinary sense.
3. A defect in a building, and in your case in a strata scheme, would simply be defined as something which is not normal in terms of its physical aspect, i.e. a physical manifestation of a breach of an applicable standard.
4. For instance that standard may be:
• a requirement that the works have the ability to prevent water ingress or to install flashings as part of the work.
• That the work is done, in a proper and workmanlike manner to achieve a particular result.
• That the standard of works expected to be done may be derived from various sources such as a building contract, plans and specifications, legislative requirements, the development consent conditions, statutory warranties and so forth.
• Legal Standards of conduct such as a duty of care.
First Notification of a Claim
1. As strata managers you may be the first person who is notified of a building defect in the scheme that you manage. That notification may be verbal or written and it will require you to take certain steps or at least know the steps that you need to take in order to ensure that you have not only protected the interest of the scheme but also covered yourself in case you are alleged to have been negligent in putting into process the steps that were required of you as a professional.
2. The question that arises thereafter is what do you do when you get a notice of a building defect claim?
Things you have to do
1. These are the initial things that you can do to commence the process, namely:
• Take detailed notes.
If you receive a verbal notification or a written one, re-visit the notice and talk to the person notifying you and obtain detailed notes about the concern/defects. The notes that you will take and the letters received can be used to compile a list of issues or defects in the process.
You will notice by keeping detailed notes a list or pattern will slowly emerge and from that you will be able to ascertain not only the nature of the defects but also the location and the seriousness of them. Remember at this stage you may not have a defects report. Your notes will in due course assist your preferred expert to pin down the defects from which a further detailed report can be developed.
• Inspect the Site
Organise a visit to the site to see first hand the defects complained of.
• Speak to the executive committee.
Notify the executive committee immediately and tell them about their responsibility to maintain and repair (s62 Strata Schemes Management Act). The owners corporation (“OC”) is responsible for keeping the building in good shape for the benefit of all owners. Therefore, you need to notify the executive committee immediately and then meet with the executives to come to a decision on what steps to take.
• Organise a defects/experts report.
Begin investigating the defects that have been brought to your notice. Speak to a suitable expert who can prepare for you a report even if that report is a preliminary one and contains a list of what that expert believes are the problems. It is also important that you choose a reputable expert who is known in the industry.
Appoint an expert who has the requisitie qualifications and the expertise on building defects, in particular, building defects in a strata scheme. If you are not sure of which expert you may or may not appoint please ring around to find one, talk to your colleague, ring your solicitor if you know one and ascertain who would be the best person for the job. Consider requesting a CV to further ascertain the expert’s expertise.
Do not sit too long on this but do your best to find the best individual for the job. Finding the best expert to prepare that first report will always be very critical because it will be the founding report and everything thereafter may turn upon that report and how the reported defects are to be treated by your adversary if the matter proceeds to litigation.
If the initial report was done with clarity and properly, the expert will have little difficulty in marrying his/her initial report to a further detailed report in the future for use in litigation.
If the founding report is incomplete or has various gaps in it then it will make not only the expert look bad but also your reputation in the eyes of your client because you are expected from your client to get the best person for the report. You should always explain to the OC the difference between the preliminary report and a more detailed report and the purpose for obtaining them. Some owners will probably query why you have to obtain two reports at their expense. You need to tell them that the inital report is just a quick presis of the defects however, if the inital report does not assist in a resolution being reached then a more detailed experts’ report will be required which will be signifiantly different to the first and more expensive.
• Attend to Emergency
If your expert recommends that some aspect of the defect needs immediate rectification then you must attend to that without delay as the OC has an obligation to maintain and repair common property so as to avoid any injury or harm to a person or property. This duty is strictly applied and the onus is on the OC to ensure that urgent repairs are attended to with promptitude (see the case of Seiwa Pty Ltd v Owners Strata Plan 35042 [2006] NSWSC 1157).
• Please notify, notify, notify.
In a large number of building defect claims we have noticed that in some cases managers or OC fail to notify the builder and its insurer of the problems and that there may be a potential claim at some time in the future.
In some instances we have seen that the notification will be left to the end when the claim is about to expire in a day or two or in some cases notification will go out after the expiration of the period of notification or in the worst case scenario never given.
I will discuss further in my paper the time limitations required for notification, however, at the outset I would like to state that it is important to note that if you have been instructed to manage a building defect claim please write in big bold letters on a piece of paper the word NOTIFY, and stick that somewhere near your desk or computer so that you do not miss out on it.
The nature of the notification should be a simple letter saying to the insurer and the builder that there is a building defect in the scheme and you should attach your expert’s report or a building defect’s report which ever may be relevant.
Keep a copy of that letter somewhere on your system or on your file and also diarise the date of that notification.
• Get legal advice
Now that you have notified the builder and the insurer what do you do next?
You do not sit there and think that the builder or the insurer will come along and accept liability for the defects. Your next most important step is to get professional legal advice. You should contact a lawyer to discuss the claim that has to be made. Obtain a costs estimate depending on what is required to be done for getting some legal advice.
Once you have received the costs estimate then discuss that with the executive committee and organise a meeting (if necessary) to pass the necessary resolutions required in order to instruct your solicitor. The solicitor will then request all of the relevant documentation that you may have in your possession to consider your options, the potential claim and strategies, that the scheme will need to implement to deal with the claim.
Summation on the check lists
1. The above are the preliminary things that you should attend to as soon as you are notified of a claim so that the claim is preserved and you have discharged your obligations to the OC.
Please note that the above tips are just some general things to keep in mind. It is not an exhaustive list. It is only a general guide.You may have your own check lists which you may have developed or tailor made overtime. That is perfectly fine as long as it has steps in it which reflect what I have said above.
It is also a worthwhile thing to keep detailed diary notes with the steps that you have taken and the dates on which those steps were taken so that in the future if an issue arises about lateness you can always go back to your notes and be able to say that you did take appropriate steps in a timely fashion.
What Defects can the OC claim? Common property or lot defects?
1. An OC is established upon the registration of a strata plan. (see s8(1) Strata Schemes Management Act 1996) The OC has the principal responsibility for the management of the strata scheme s8(2). For this purpose, the owners of the lots from time to time in a strata scheme constitute a body corporate (see s11(1)).
2. An OC has, for the benefit of the owners, the management and control of the use of the common property of the strata scheme. s61(1). In particular, the OC has responsibility for maintaining and repairing the common property of the strata scheme s61(2)(a).
3. Its duties include:
• Properly maintaining and keeping the common property in a state of good and serviceable repair (s62(1); and
• Renewing and replacing fixtures or fittings comprised in the common property (s62(2)(b)).
4. Common property is defined in Part 1 of the Dictionary to the Strata Schemes Management Act to mean:
“So much of a parcel as from time to time is not comprised in any lot.”
5. Section 227 of the Strata Schemes Management Act provides as follows:
• This section applies to proceedings in relation to common property.
• If the owners of the lots in a strata scheme are jointly entitled to take proceedings against any person or are liable to have proceedings taken against them jointly, the proceedings may be taken by or against the owners corporation.
• Any judgment order given or made in favour of or against the owners corporation in any such proceedings has effect as if it were a judgment or order given or made in favour of or against the owners.
• A contribution required to be made by an owner of a lot to another owner in relation to such a judgment debt is to be at the same proportion to the judgment debt as the unit entitlement of the contributing owner bears to the aggregate unit entitlement.
6. However, s226(1) provides, inter alia that nothing in the Strata Schemes Management Act derogates from any right or remedies that an OC might have in relation to the common property apart from the Strata Schemes Management Act.
7. Division 2 of Part 2 of the Strata Schemes (Freehold Development) Act 1973 (“SSFDA”) in particular s18 states as follows:
“Upon registration of a strata plan any common property in that plan vests in the body corporate for the estate or interest evidenced by the folio of the register comprising the land the subject of that plan but freed and discharged from any mortgage, charge, covenant charge, lease, writ or caveat affecting that land immediately before registration of that plan.”
8. Section 20 of the SSFDA provides:
“The estate or interest of a body corporate in common property vested in it or acquired by it shall be held by the body corporate as agent:
(a) where the same person or persons is or are the proprietor or proprietors of all of the lots the subject of the strata scheme concerned-for that proprietor or those proprietors, or
(b) where different persons are proprietors of each of two or more of the lots the subject of the strata scheme concerned-for those proprietors as tenants in common in shares proportional to the unit entitlements of their respective lots.”
9. In accordance with the above statutory provisions it can be seen that common property is vested in the OC whereas anything within the lot is vested in the lot owner.
Claim against the builder
1. For the purposes of bringing a building defect claim against the builder/developer any defect arising within the common property can only be claimed for by the OC.
2. Any defect arising within the lot is a defect that has to be claimed for by the lot owner.
3. As stated above the issue of determining what is common or lot defect can often be a difficult exercise and confusing but this will need to be ascertained early.
4. In some instances an OC, which is ill advised, may proceed to claim all of the defects on the supposition that it has the standing to also bring a claim for lot defects in the same application.
5. The distinction between common and lot defects may at times be obscured and the person bringing the claim may decide to let it go until he or she finds out at the Tribunal or at Court that a large majority of the defects claimed for had nothing to do with the common property.
6. This may pose a number of practical problems in the litigation process because if the majority of the defects in the OC’s claim were lot defects as opposed to common property defects then the lot owner may have missed the opportunity to also bring a claim in his or her own right for lot defects as the time limit for bringing such a claim may have either expired or is about to expire.
7. More importantly if the bulk of the defects claimed were lot defects in respect of which the OC does not have the standing to bring a claim for and as a result of that the claim has to be reduced significantly then the builder or developer may have the opportunity to claim costs which in some circumstances may be claimed on an indemnity basis against the OC. This will rarely occur because your lawyer would know about this and will not claim for lot defects unnecessarily however, it is important that you understand the distinction and when the OC will have the standing. If the lot defects are significant the lawyer will advise that the lot owner also bring a separate claim for lot defects and that can be done at the same time with the common property defects but separately. Every single application carries with it certain costs implications and in some instances lot owners may just forgo their right to bring a claim individually as they may not afford the attendant legal costs including costs that may be awarded against them if the claim is lost. It will come down to the nature and quantum of the rectification costs involved with lot defects. If the defects are very serious and the rectification costs will be exorbitant then the lot owners should be encouraged to bring a claim otherwise they may never be able to have such defects rectified appropriately. In the future if the lot owner decides to sell and hopes to get a desired price on the open market that price may be affected as a result of the defects.
8. A lack of precision and care in ascertaining what are common and lot defects can be disastrous. My advice is that the OC must have a very close regard to the defects list and with the help of their advisors limit the defects to common property defects so that the OC can have standing to bring the claim and also ensure that lot defects are also well articulated so that the lot owner can consider bringing a claim as well.
Claim Against Insurer
1. The HBA has mandatory insurance provisions in Part 6 Division 4 of the Act. The HBA does not apply to non-residential building work and insurance is not mandatory in relation to residential building work over 3 storeys commenced since 31st December 2003.
2. Insurance cover under the HBA falls into two types which are commonly called First Resort and Last Resort. The scheme changed from First Resort to Last Resort on 1st July 2002. In order to determine which scheme the building work comes under, you must look at the date of the insurance policy.
First Resort
1. First Resort insurance allows an insured owner to immediately make claim on the insurance policy without having any recourse to any other party that may be liable for the defective work.
2. This scheme covers both structural and non-structural defects for a period of seven (7) years from the date of completion of the building works.
Last Resort
1. Last Resort insurance is the current scheme. The requirements for insurance are set out in section 99 of the HBA:
2. Last Resort does not insure against defects but rather it insures against the inability of an owner to recover the cost of rectification or have the defects rectified by the builder. The Act requires that the owner must diligently pursue its remedies against the builder before being able to have recourse to the insurance.
Time Limitations for Bringing a Building Defects Claim
1. The next major thing in any building defect claim is for you to understand and assess the time limitation issues which surround the bringing of a claim. This area of time limitation again is extremely confusing and some people may fall foul of the limitations.
2. You may think that your lawyer will overcome any limitation problems and that everything is sweet and things will fall into place as you anticipate. Your lawyer is not a magician. He/she has to fit your case within the established legal principles and in building defect claims bring your claim within the allowable time if time has not already expired. Such an approach is ambitious as you may find out very soon from your lawyer that the claim referred for advice cannot proceed because the claim is statute barred. Worse, if you realise that you were a contributory to the expiration of the claim. All sorts of ramifications are likely to follow from then on and that is something you must avoid.
3. Get to know how to calculate the cut off dates for notifying the insurer under the HOW scheme and the time periods for bring a claim for breach of statutory warranties under the HBA and in negligence.
4. These time limits will now be discussed below.
5. There is a difference between the time limits that operate under the HBA for bringing a claim for breach of statutory warranty and negligence and notifying the insurer, i.e. the home owner warranty insurer (“HOW”) of a potential claim.
When to “notify” the HOW insurer of the defects?
1. The time for notifying the HOW insurer about the defects will expire:
• 6 years after completion of the construction of your building in the case of structural defects.(s103B(2)(a) HBA)
• 2 years after completion of the construction of your building in the case of non-structural defects.(s103B(2)(6) HBA)
When to “Claim” for the defects in Court or Tribunal –v- Builder & Developer?
The 7 year period (breach of warranties)
1. The time for making a claim against the builder or developer will expire as follows:
• 7 years after the date on which the construction of your building was completed for a claim against the builder or developer for a breach of the statutory warranties for residential building work contained in the HBA. (s18E HBA).
The 6 year period (in negligence)
• 6 years after the defects became apparent or became discoverable by reasonable diligence for a claim against the builder in negligence.
The 10 year period (Environmental Planning and Assessment Act 1979)
• In either case, 10 years after the date on which the final occupation certificate for your building issued (if the time for making a claim has not expired beforehand). (s109ZK Environmental Planning and Assessment Act 1979).
HOW claim
1. For a HOW insurance claim time runs from the time the building works were completed.
2. Moreover you must bear in mind that a claim can only be made upon the HOW insurer if the builder cannot be found, has died, ceased trading or been declared a bankrupt.(s99 HBA)
3. For claims against insurers it must be noted that to come within the claim requirements an insurance claim must meet all three sets of time limits as described above. (see Scoby v Fair Trading Administration Corporation (Home Building) [2005] NSWCTTT 2007).
4. It has been said that the purpose behind imposing such statutory time limits is that “unless problems are attended to as soon as possible, further damage may be done and this may be prejudicial to the party against whom a claim is made, be it the builder or the insurer” (The Owners – Strata Plan 5611 v Fair Trading Administration (Home Building) [2005] NSWCTTT 614).
5. Given the relatively specialised level of knowledge in this area, if you are the strata manager, the managing agent or on a committee of a residential strata complex please ensure that the governing body gets specialised legal advice as soon as possible so that good claims do not evaporate as the time goes by.
Types of Legal Action
The deadline for taking legal action against the builder or developer for defective building work depends upon the type of legal action that you intend to bring. The owners corporation is able to bring legal action against the builder or developer for building defects for two reasons:
Breach of Statutory Warranties
• Because the builder and the developer have breached the statutory warranties under the HBA.(s18B HBA)
For example, The builder and the developer failed to ensure that the building work will be performed in a proper and workmanlike manner, that all materials used will be fit for their intended purpose and that the work will result in a dwelling that is reasonably fit for occupation as a dwelling.
Negligence
• Because the builder has breached a duty of care that it owed to the OC to exercise reasonable care and skill and competence in conducting the building works so as to give rise to the building defects. (see Brian v Maloney 1995 182 CLR 609 and Wilcox Street Investments Pty Ltd v VCDG Pty Ltd (2004) 216 CLR).
1. The first claim is often referred to as a claim for breach of statutory warranties under the HBA and the second is known as a claim in negligence.
2. In the Statement of Claim your lawyer will plead the breach of statutory warranties as the primary cause of action and then as a back-up or in the alternative plead a claim in negligence.
3. This is done because in case the owners corporation fails to establish the breach of statutory warranties then it has a fall back position where it can then try to prove its claim in negligence.
Other Claims
There are possibly other types of legal claims which the owners corporation may have against the builder or developer such as a claim for misleading and deceptive conduct under the Australian Consumer Law however, these are generally peripheral claims which are not often run and which in any event have shorter cut off dates than a HBA claim or a claim in negligence.
Possible Defendants
1. The types of people that the OC can bring legal proceedings against will more often be the builder and the developer. In appropriate cases other entities such as the architect, private certifier, council and other sub-contractors can be joined.
2. As stated above a building defect claim is usually brought against the builder and the developer. If the builder or the developer decides to join others they may do so or, alternatively, they may notify you to join other potential defendants.
3. I will discuss towards the end of this paper other potential defendants that need to be kept in mind under the Civil Liability Act 2002 and how that Act will impact upon a claim.
“Must” Claim and Not “May”
1. Legal action for a breach of statutory warranties as already stated above must be commenced, and I emphasise the word must, within seven (7) years after the completion of the work to which it relates or if the work is not completed (incomplete work) then the date of completion of the work specified or determined in accordance with the contract, or if there is no such date, then the date of the contract (s18E HBA).
2. The critical thing in this section is the seven (7) year time limit and the date of completion.
3. No further extensions can be granted beyond the seven (7) year cut off date.
4. Therefore, if you are one or even two days out of the seven (7) year cut off date you have missed the time limit and no further extensions are available.
5. This is because s18E of the HBA makes it mandatory for proceedings for breach of statutory warranties to be commenced strictly within seven (7) years. The section uses the word must and it does not use the word may.
6. There is no discretion given in s18E to allow the Tribunal or the Court to extend the time after the expiration of seven (7) years.
How do you determine Date of Completion of works?
1. Unfortunately, the HBA does not specify the completion date for the purposes of calculating the deadline for making a claim.
2. However, the Home Building Regulation 2004 (HBR) does specify the completion date for the purposes of calculating the period of time available to make the HOW insurance claim.
3. Clause 61 of the HBR says that the completion date is taken to be:
• The date that the work is completed within the meaning of the building contract under which it was done; or
• If there is no binding contract or the contract does not specify the completion date on the date of the final inspection of the work by the private certifier or local council; or
• In any other case, on the last date the builder attends the site to complete the work or handover possession to the owner.
4. Clause 61 may give you some assistance but it only relates to calculating the notification period for making an insurance claim under the HBA however it does not in any definitive way assist us in defining the completion date for calculating the bringing of proceedings for breach of statutroy warranties under the HBA.
Judicial Guidance on Completion
1. To ascertain the date of completion of the building works there is some guidance given by the courts in relation to completion of works and how it is determined.
2. Generally speaking a good starting point would be to look at the final occupation certificate.
3. Other factors that may assist you in determining the date of completion if you do not have a final occupation certificate is to do a strata search to see when the surveyor’s certificate was signed or when the strata plan was registered. The date of completion is likely to be some time prior to the signing of the surveyor’s certificate and the registration of the strata plan.
4. This is not a definitive way of calculating the date of completion but it is at least a tool that you can use in order to quickly ascertain whether you are moving closer to the expiration of the time limit or are you already statute barred.
5. In Owners Strata Plan 62930 v Kell & Rigby Holdings Pty Ltd [2010] NSWSC 612 Ward J observed that completion meant “when the construction of the building effectively came to an end and that practical completion was a relatively clear signpost”. This observation of Ward J is not very helpful in practice.
6. In Abrahams v Diegan [2009] NSWDC 315 the New South Wales District Court held that date of completion was the date of the final inspection of the work. In coming to that view the District Court had regard to two decisions in the Consumer, Trader and Tenancy Tribunal of New South Wales (“CTTT”).
7. Those decisions were the Owners Corporation SP64096 v D Olsen Constructions Pty Ltd (Home Building) 2008 NSWCTTT 105 (“Olsen”) and Owners Corporation SP66090 v Sydney Commercial Builders Pty Ltd & Anderson (Home Building) 2008 NSWCTTT 1096 (“Sydney Commercial”).
8. In the case of Olsen, the CTTT rejected the argument that completion meant “practical completion”.
9. In Sydney Commercial the Tribunal rejected a submission that completion meant the date when a certificate of occupancy was issued. The senior member went on to decide the matter on the basis of when actual completion was achieved.
10. In a large majority of the cases applicants or the plaintiff will rely on the date of the final inspection of the work as it will be the date in most cases when the local council will issue an occupation certificate. A final inspection of the works should not be confused with the final occupation certificate as the inspection precedes the final occupation certificate.
11. In Abrahams’ case the District Court came to the view that the applicable date for the date of completion was the date of the final inspection of the work. As a result the District Court held that the plaintiff’s case was not statute barred under s18E of the HBA. The approach in Abrahams’ case is helpful and has been subsequently followed by the CTTT in Vero Insurance Limited v Filipi and Fagimo Pty Ltd [2009] NSWCTTT 708; Owners Corporation SP69123 v Romanous Constructions Pty Ltd [2010] NSWCTTT 23; Owners Corporation SP62666 & Ors v Bailey & Ors [2009] NSWCTTT 493; Mortimer v Bittick [2011] NSWCTTT 13; Caroll & McManus v Murray [2011] NSWCTTT 30; and Owners Corporation SP7132 v Meridien Developments and Constructions Pty Ltd [2011] NSWCTTT 273.
12. In the event that you do not have sufficient information to ascertain the date of completion you should immediately consider making an application to the local council for the relevant strata scheme for informal access to the council’s records to ascertain the date of completion in accordnace with the requirements as discussed above. This application is generally free and can be made either by facsimile or email. The forms for informal access will be available on the website of the respective local council. If it is not, ring the council immediately to obtain a copy.
13. The task of perusing council files can be carried out by you or more preferably by your lawyer who will know the documents to look for in ascertaining the date of completion.
14. Please note that local councils generally take time to access their archives in order to make available the files relating to your strata scheme before making them available for access.
15. The earliest that you can make the application for informal access the better because if the time limit for bringing a claim under the HBA is a few weeks away, then at least by the time the file is accessed and the information required is ascertained, you may just be in time to bring a claim within the time limit. However, if you leave it too late then any informal access to obtain council’s files and records may just be a waste of time particularly if you find out that you have just missed the time limit.
16. In our experience we have noticed that in most cases you probably will not have a copy of the building contract between the builder and the developer (if one exists).
17. As a result you may have no knowledge of when the work was taken to be completed within the meaning of the building contract which in turn makes it very difficult to work out the date of completion or the cut off date for making a HBA claim. It is a suggestion that the date of the final occupation certificate should be used only as a rough guide for determining the completion date as you will need to understand that the actual completion date may be several weeks or months before the date of the issuance of the final occupation certificate.
18. The works can be completed prior to the private certifier coming on to the site in order to satisfy itself of the completion of the work. Be very cautious in this regard and always use the final occupation certificate as a guide only.
19. This is an area which is problematic and will cause various problems in the claims procedure until such time as we have a more definitive meaning of the date of completion.
20. It would be preferable if the NSW legislature would clarify this for us by amending the HBA and inserting a section telling us what to look for re: date of completion.
21. Until then you must always exercise caution and make conservative estimates of the date of completion and once you have made that estimate and you believe that the seven (7) year period for making a HBA claim is about to expire then you should seriously consider taking legal action immediately so that you can preserve your rights to do so. Your conduct in relation to misisng the time limit under the HBA can come back to haunt you.
22. Any delay in bringing the claim which results in the claim being missed because of the strict time limit may pose a problem for your professional indemnity insurer.
23. Therefore, please note that you must always be very pro-active from the moment you have been given a brief to handle and manage a building defect claim. As potential claims are usually large the last thing you want is to give the executive committee or the owners any ammunition to come back and blame you for the loss.
24. I, reiterate that it is extremely difficult to determine precisely the date of completion and as a result you should always exercise extreme caution when calculating the deadline for taking legal action, notifying the insurer or making insurance claims. If you believe the deadline or the cut-off date for taking legal action, notifying the insurer or making an insurance claim is about to expire you should commence legal action and make an insurance claim immediately to protect the interests of the owners.
The time to make a negligence claim
1. The action in negligence is often pleaded in the Statement of Claim as an alternative or in layman’s terms as a back up. The HBA unfortunately does not specify the time limitation for bringing a claim for negligence because negligence is founded at common law. Over time various causes of action in negligence have been developed and they all have special and/or specific time limits. Under the Section 14(1) Limitation Act NSW 1969 a claim based in negligence, is not maintainable if brought after the expiration of a limitation period of six (6) years running from the date on which the cause of action first accrues to the person making the claim.
2. A structural defect in a building may reveal itself over time. This may progress initially with some minor cracking requiring some superficial repairs but the underlying problem or defect will not immediately appear or be known. The Courts have held that even where actual damage which is caused by a latent defect in a building has been suffered, the cause of action does not accrue (and time to make a negligence claim does not begin to run) until the link between the physical damage to the building and the underlying defect is known or ought to be known. (Pullen v Guttridge Haskins & Davies Pty Ltd 1993 1 VR 27).
3. In negligence the question in relation to the discovery of building defects is when does the cause of action first accrue?
4. An action in negligence, first accrues when occurrence of damage or loss as a result of a breach of duty of care is known or ought to have been reasonably known. Ascertaining the date when the cause of action in negligence commences can be a dauntng task particularly when superficial defects appear months or years after the construction but the full extent of a latent building defect only becomes apparent much later.
5. Previous case law has expressed the first accrual of such a loss in different ways:
• When defects become manifest or otherwise discovered (Scarlett v Lettis [2000] CA 289;
• As soon as more than negligable damage is sustained (Shirson & Associates Pty Ltd v Baily & Ors [2000] NSWCA 275;
• When the link between the physical manifestation and the underlying latent defect first becomes known or ought to be known (Pullen v Gutteridge)
• When the latent defect, and not merely the physical damage manifest (Echo Investments Pty Ltd v Austra Constructions Limited & Ors; The Owners Strata Plan 64970 v Austra Constructions Limited & Ors [2009] NSWSC 2008 at 73).
6. Depending upon the way in which building defects become apparent in any case, application of the tests outlined above can result in very different points in time from which a cause of action starts to run in negligence.
7. In its most recent judgment the New South Wales Court of Appeal has sought to clarify the relevant test and serves as a reminder to investigate the extent of building defects and identify all of the parties potentially responsible for the defects as early as possible after defects are noticed.
8. Cyril Smith & Associates Pty Ltd v the Owners Strata Plan (“Cyril’s case”) 64970 [2011] NSWCA 181 (6 July 2011) case concerned an eight storey residential building which was completed in early 2001. By the end of 2001 water penetration had regularly caused damage to a number of units and the steel structure supporting the roof was rusting. In 2005 the OC commenced proceedings for damages against the builder. On 8 February 2008 leave was granted to the OC to join architects Cyril Smith & Associates to the proceedings. The primary issue for determination by the Court of Appeal was whether the six (6) year limitation period had expired before the proceedings were commenced against Cyril Smith & Associates. The relevant date for accrual of the cause of action was therefore 8 February 2002. On appeal, the Court of Appeal held that at most, the previous case law was authority for the proposition that it is the physical defect and not the cause of the defect which must be identifiable for the limitation period to start running.
9. In Cyril’s case the Court of Appeal found that the relevant defect was not the ingress of the water or the design, installation or inspection of the windows, but the windows themselves. Once the owners appreciated that the windows themselves were defective in that they were not adequately water tight, the defect was known and the time for commencing proceedings in negligence had begun to run. The Court of Appeal confirmed that it was not necessary for the owners to identify the cause of the defect being the design by Cyril Smith & Associates. The Court of Appeal accepted that knowing that the windows were defective did not mean that the owners knew who was responsible however, the time within which the owners needed to ascertain who was responsible and if necessary commence proceedings had started to run from the time they knew that the windows were defective. Because the owners did not commence proceedings against Cyril Smith & Associates within six (6) years from that time the claim against Cyril Smith & Associates was therefore statute barred.
The Result
1. The Court of Appeal therefore has determined that knowledge of the existence of a physical defect is sufficient to start the limitation period running in negligence.
2. Unfortunately this decision does not clarify the extent to which a latent defect is required to be known for the limitation period to commence. What is certain is that it is not necessary to know the whole extent or cause of a defect or the parties responsible for the defect for the time for commencing proceedings to start running. Given that investigations to discover the extent, causes and parties responsible for building defects can sometimes develop over years, it is imperative for potential plaintiffs to start those investigations as soon as physical signs of the damage are apparent.
3. To sum up, the six (6) year period to make a negligence claim against the builder begins from the date on which the OC knew about the defects or it ought to have reasonably known about the defects in the sense that the defects were reasonably discoverable.
10 year cut off for making a HBA or negligence claim
1. Section 109ZK of the Environmental Planning and Assessment Act 1979 provides that a claim for loss or damage arising out of defective building work cannot be made more than ten (10) years after the date on which the relevant final occupation certificate of the building is issued.
2. The cut off date imposed by this section generally will have no impact on the deadline for making a HBA claim however it can reduce the amount of time that is available to make a negligence claim.
3. In a recent case the Owners Strata Plan 56963 v Australand [2011] NSWSC 710 a local council issued a final occupation certificate in relation to a strata scheme on 24 April 1998.The OC initiated legal action against the builder on 18 March 2011 alleging the builder was negligent. The OC was relying on the fact that the defects became apparent or were discovered within six (6) years of the date on which the legal action was taken against the builder. The court held that because the legal action was commenced more than ten (10) years after the final occupation certificate was issued, s109ZK prevented the owners from maintaining its legal action against the builder and therefore its claim was dismissed. The court explained that s109ZK was intended to provide a drop dead date after which building claims could not be brought.
4. Please note that s109ZK is not intended to give you the right to have an extension of your negligence claim or the HBA claim to ten (10) years. Rather it operates to prevent any claim being made more than ten (10) years after the final occupation certificate has been issued. You must at all times adhere to the strict time limits imposed under the HBA and the six (6) year limitation imposed for bringing a negligence claim.
5. You will only be able to access the HOW insurance if you are able to demonstrate that the builder has become insolvent, dies or disappears (s99 HBA).
6. The notification in relation to an insurance claim and bringing a claim for insurance operates hand in hand with any claim that you may wish to bring under the HBA or under negligence.
7. For insurance policies issued prior to July 2002 (first resort policy) a claim can be made directly to the HOW insurer without any need to commence legal proceedings provided such a claim is made within 7 years of the date of completion.
8. For insurance policies issued after July 2002 (last resort policy) you will need to notify the insurer within 6 years for structural defects and 2 years for non-structural defects, bring legal proceedings within 7 years from the date of completion, obtain a judgment against the builder/developer, wind up or bankrupt the builder (if the builder still exists) and then make a claim under the HOW insurance policy.
9. For last resort policies the only time you can go directly to the insurer and make a claim if you are within time and the builder or developer has either disappeared, is insolvent or deceased.
10. To ascertain the contact details of the insurer you should obtain a copy of the HOW insurance certificate if you can find one.
Civil Liability Act 2002
If a building defect claim has been brought against a builder or developer for the breach of statutory warranties, the portion of damages which the OC may recover from the builder/developer will be severely reduced if the Court decides to apportion liability. On the introduction of the Civil Liability Act, applicants or plaintiffs have to take heed of the Act which requires other potential wrong doers to be joined into the proceedings so that the damage that will be recovered will be apportioned amongst those co-wrong doers. The builder or developer may write to your lawyer and put them on notice of other potential wrong doers. If such is the case you must immediately turn your mind to joining other parties to the proceedings because you do not want to miss out on recovering your loss. In a recent case of Owners Corporation SP72357 v Desko Constructions Pty Ltd [2010] NSWSC 819 the OC sued the builder and other parties for defective building work under HBA. The defendant builder defended the claim and relied in its defence upon the proportionate liability provisions of the Civil Liability Act 2002 contained in Part 4. As stated above Part 4 of the Act allows a court to limit the liability of a defendant to an amount that reflects the proportion of damage or loss claimed which the court will consider just having regard to the defendant’s responsibility for the damage or loss. The Court held and confirmed that Part 4 of the Civil Liability Act 2002 now applies to claims based upon a breach of statutory warranties and as a result the liability of the builder in this particular case was reduced.
Excess
1. Once you have successfully prosecuted your claim and it is accepted by the HOW Insurer payment of excess will become relevant. The issue in relation to excess that has often arisen is whether excess is to be paid per lot or per claim. An excess of $500.00 which is required to be paid once a claim has been accepted by the insurer.
2. This issue was considered in Vero Insurance Limited v Owners of Strata Plan No 69352 & Ors [2011] NSWCA 138 recently by the New South Wales Court of Appeal. The relevant residential strata scheme in this particular case contained 201 lots. The insurer’s argument was that each of those lots must pay $500.00. The OC argued that it was only responsible to pay $500.00 for the claim. The Court of Appeal held that the owners corporation was only entitled to pay an excess of $500.00 per claim. It was not responsible to pay $500.00 per lot. In conclusion the Court held that the OC was entitled by statute to make a claim in its own right it therefore followed that only one claim was made and accordingly the excess applicable to that claim was $500.00. Therefore if excess is stated to be $500.00 it means $500.00 per claim not per lot.
Conclusion
1. The lesson that is to be learnt is that if a building defect claim is to be successfully prosecuted then you must observe the strict time limits. Those time limits cannot be extended no matter how sympathetic the circumstances may be. Due to the strict imposition of the time limits the OC, strata manager and the lawyer all have to be very cautious, pro-active and diligent in the way that they manage and/or process a building defect claim not only from the time of its inception but until its conclusion.
2. A lot of work is required to be done to source all of the relevant information that will assist in the making and processing of the claim and if a particular information is difficult to obtain or ascertain then you must immediately seek help from your colleagues or find a way in which you can address your difficulties.
3. Building defect claims cannot be put aside in the earnest hope that you will prosecute them once all the information is at hand. As soon as you are notified of a claim please do the best within your knowledge and ability to address the claim through the proper channels so that in the future you do not have a situation where you could have done more but you failed to do so.
4. Diarising dates and relevant information can become critical and critical dates should always be entered on your system so that you are always reminded of any deadlines that are forthcoming.
5. Finally, as you would have realised how involved a building defect claim can be it is important that you keep your client, the OC, in the loop by keeping it informed of the status of the claim so that it knows how things are progressing. Lot owners often become very frustrated when they do not understand the mechanics of the process nor receive sufficient communication or information about the process.