Insurance in MOtion – NSW Court of Appeal examines liability of developers and builders for defects in design under the Home Building Act 1989

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On 3 August 2018, the NSW Court of Appeal handed down judgment in The Owners Strata Plan No 66375 v King [2018] NSWCA 170. The decision examines the extent to which a trial judge should have drawn an inference that a contract had been signed by the developers from the surrounding facts and examines the liabilities of both developers and builders under s18B and s18C of the Home Building Act 1989 (NSW) where there are errors in the design of the works where the design was provided by the developer.

This case involved a dispute as to the liability for building defects in relation to a mixed residential and commercial strata development in Camperdown, NSW. The development involved the conversion of a warehouse complex originally built in 1928. The conversion works were performed by a builder who was engaged by the developers, David and Gwen King, the founders of King Furniture. The units were then sold. After occupation the owners of the units discovered that the building contained significant waterproofing and fire safety defects, necessitating some $5,000,000.00 worth of rectification works.

The Owners – Strata Plan No 66375 (the Owners Corporation), sued the developers of the building, David and Gwen King under s18C of the Home Building Act 1989 which provides that developers are liable for defects. The Kings defended the proceedings on two grounds.

No signed building contractThe first ground was that they were not liable as developers as they had not signed the building contract under which the work was done . At the time, in order to be liable as a developer, the Kings had to have been a party to the building contract. Note that it is no longer a requirement in NSW that the developer be a party to the contract as a result of amendments to the Home Building Act 1989. No signed copy of the contract could be located. The Kings argued that the Owners Corporation was required to prove that they had signed the contract and could not do so. However, there were numerous site minute meetings and other evidence suggesting the Kings had signed the contract and the Owners Corporation asked the Court to draw an inference that the Kings had in fact signed it.

On the question of the drawing of inferences, even though a signed copy of the contract could not be located, the Court found that the evidence pointed overwhelmingly to the contract having been formally executed by the Kings and found that the inference that they had done so was irresistible. The Court was critical of the Kings failure to give evidence and found that the surrounding evidence which suggested the Kings had signed the contract was such that their failure to give evidence to explain or refute it entitled the Court to draw an adverse inference against them.

Defects were caused by faulty design

The second defence the Kings raised was that, as developers, they were only liable for defects that the builder was liable for. Because some of the defects arose from errors in the plans and specifications (which they had provided to the builder) they argued that the builder was not responsible for those design defects and in turn, because they had the same liability to the Owners Corporation as the builder did, they were not liable for the design defects either.

On the question of liability for defects in design, the Court found that, where a builder has been engaged to do work under a “construct only” contract and follows the plans and specifications provided by the developer, if there is an error in the design, both the developer and builder will be liable for that error. The Kings had argued that the warranty that work be carried out in accordance with the plans and specifications took precedence over the warranty that the work comply with the law. The Court examined the statutory warranties in s18B of the Home Building Act 1989 (which Developers are also liable for under s18C) and found that the two separate warranties that:

  1. the work will be carried out in accordance with the plans and specifications and;
  2. that the work will comply with the law.

should be read together such that the builder (and developer) warrants that the construction of the work in accordance with the plans and specifications will comply with the law. As a result, even though the builder may have followed the plans and specifications, if those plans and specifications are defective and, when followed result in work that does not comply with the BCA, the builder (and developers) will be liable for those defects.

This aspect of the decision has important consequences for builders and developers as it means they cannot avoid liability for a defect on the basis that they followed the plans and specifications they were given by others.

It should be noted that, for building contracts entered into after 15 January 2015, a defence is available to builders under s18F(1)(b) of the Home Building Act 1989 of “reasonable reliance” on instructions given by a relevant professional acting for the developer or owner person, being instructions given in writing before the work is done or confirmed in writing after the work is done. It remains to be seen how the reasonable reliance defence in s18F operates in practice.

Mills Oakley acted for the Appellant in the NSW Court of Appeal proceedings. Read more here.

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