Defective structure or defective design – which is it and what does it mean?

By Ziv Ben-Arie, Partner, Vlad Vishney, Senior Associate, and Nawid Cina, Paralegal. 

Summary

The recent decision of His Honour Stevenson J, in AAI Ltd T/as Vero Insurance v Kalnin Corp Pty Ltd; Kalnin Corp Pty Ltd v AAI Ltd T/as Vero Insurance [2017] NSWSC 548 (Vero) examines the breadth and meaning of the term ‘structural defects’ within regulation 57AC of the Home Building Regulation 1997 (NSW). The case appears to depart from previous positions and adopts a narrow interpretation of the term, seemingly limiting structural elements to those components that contribute directly to the structural integrity of the building.

Facts

Mr Laurence Kilning, constructed the property in Redfern NSW (Works), through Kalnin Corporation Pty Ltd. Vero Insurance provided Home Warranty insurance (Policy) for the Works and obtained an indemnity from Mr Kilning (Indemnity). Four years after the Works were completed, Vero was notified of defective work, allegedly ‘structural defects’, which resulted in a payout of $4.32 million to the beneficiaries of the Policy. Vero sought to enforce the Indemnity and recover that sum from the defendants.

Findings

Regulation 57AC(1) defines a structural defect as ‘any defect in a structural element’. A recent decision in NCAT (Westfarmers General Insurance v Jameson)[1] followed previous cases by taking a wide approach to the definition of a ‘structural element’, including within its purview, those defects attributed to design.

In Vero, his Honour departed from the ‘wider’ approach and held that for a component to be a ‘structural element’, it must contribute to the essential stability of the building, i.e. it must be ‘load bearing’ in nature.[2] Elements that are connected to ‘load bearing structures’ but play no part in promoting the structural integrity of the building are not to be considered as structural elements. These include components such as waterproofing membranes, tiling or any design based element. It is noteworthy that these are elements which have previously been included in the ambit of ‘structural elements’.

Regulation 57AC(2)(b) notes that a structural element is ‘any component (including weatherproofing) that forms part of the external walls or roof of the building’.[3] His Honour also applied a narrow approach to this provision, interpreting ‘components’ to be elements directly connected to the support of the external walls or roof, which in turn support the integral structure of the building. Examples of these structural elements include weatherproofing, brickwork, a steel beam that forms part of an external wall, roof tiling and flashing ‘if it diverts moisture out from the cavity between the load bearing walls’.[4]

Relevantly, his Honour rejected a submission by the Plaintiff that the failure of the building to reflect the proper design led to the prevention of its ‘continued practical use’, as the building could still be used for the purpose for which it was built. Extending from this, his Honour construed the consequences of structural defects described in regulation 57AC(1) as those ‘major or catastrophic results’, upon the building.

Impact

The 2015 legislative reforms of the regulation replaced the terms ‘structural defect’ and ‘structural element’ with ‘major defect’ and ‘major element’. Despite this, the present case’s limitation of ‘structural elements’ to components which directly support the integrity of the building remains relevant, and will most certainly inform future applications of the regulation.

Owners need to ensure that they promptly investigate any structural issues within the limitation period, or be exposed to not insubstantial losses. Contractors may now argue a narrow scope for structural defects, thereby potentially limiting liability under section 18B of the Home Building Act 1989 (NSW) to two years for structural defects.

 

[1] [2016] NSWCATAP 136.

[2] AAI Ltd T/as Vero Insurance v Kalnin Corp Pty Ltd; Kalnin Corp Pty Ltd v AAI Ltd T/as Vero Insurance [2017] NSWSC 548, 93.

[3] Home Building Regulation 1997 (NSW).

[4] AAI Ltd T/as Vero Insurance v Kalnin Corp Pty Ltd; Kalnin Corp Pty Ltd v AAI Ltd T/as Vero Insurance [2017] NSWSC 548,105.

 

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