One of the Most Important Building Defects Decisions of our Time

The case of The Owners – Strata Plan No. 66375 v King [2018] NSWCA 170 (“the Kings Case”) handed down on 3 August 2018, has been described as one of the most important decisions concerning building defect litigation that New South Wales has seen in recent times.

Streeterlaw has thoroughly read and considered the various issues raised by the landmark decision in the Kings case, and has broken down the most important parts of the case for your easy reading:

Facts

1. The case concerns defective building work that was undertaken when a warehouse was converted into a mixed residential and commercial strata development in Camperdown, Sydney, called ‘The Grace’.
2. The owners of the warehouse were Mr David King and his mother, Mrs Gwendoline King (“the Kings”).
3. Mr and Mrs King were directors of a company, known as Meridian Estates Pty Ltd, and executed a Development Application under the name Meridian (assisted by an architecture firm called Bonus Architects).
4. In 2002, through Meridian Estates Pty Ltd engaged a Builder, Beach Constructions Pty Ltd (“Beach Constructions”), to carry out residential building work associated with the conversion of the warehouse to a mixed-use, residential and commercial strata building.
5. The work undertaken by Beach Constructions Pty Ltd was defective.

The Case at First Instance

In 2007 the Owners Corporation sued Breach Constructions (as the Builder), the Kings (as the Directors of the Developer), Meridian Estates Pty Ltd (the Developer) and, Suncorp Metway Insurance Ltd (as the home warranty insurer) for compensation to recover the cost of repairing the defective and incomplete work.

During the course of the case, Beach Constructions and Meridian Estates Pty Ltd went into liquidation and the Owners resolved its claim against the Insurer, Metway Insurance Ltd (by way of a settlement) – this left the Owners Corporation with the only potential party being the Kings, in their personal capacity.

At first instance, the Owners Corporation claim against the Kings was not successful because the Supreme Court said that the Kings did not sign and were not parties to the Building Contract with Beach Constructions to undertake the residential building work, and even if they were the Developers they would not be liable for any defects that arose from defective design.

This essentially meant that the Kings were not technically considered to be developers which also meant they technically did not owe the Owners Corporation any warranties as to the quality of work done by Beach Constructions.

This was not a satisfactory outcome for the Owners Corporation at all.

The Case on Appeal

The Owners Corporation were not happy with the outcome of the case (we wouldn’t have been either!)…so they took the case on appeal to the NSW Court of Appeal.

The Court of Appeal were asked to focus on the following three key issues:

1. Whether Mr and Mrs King specifically were parties to the building contract with Beach Constructions?
2. Whether a builder or a developer is liable to an Owners Corporation for defective design elements?
3. Whether the developer and the builder have the same liability to the Owners Corporation for building defects under the Home Building Legislation.

Snapshot of each of the Issues on Appeal

Let’s now look at each of the issues that the NSW Court of Appeal had to consider and how the NSW Court of Appeal overcame these issues to give us one of the most significant building defect decisions of our time:

The Owners Corporation could not produce a copy of the building contract with Beach Constructions that had been signed by the Kings.

Decision:

Despite the fact that the Owners Corporation could not produce a copy of the building contract between Beach Constructions and the Kings, the NSW Court of Appeal concluded that the Kings did sign, and were parties to, the Building Contract with Beach Constructions.

The Court of Appeal decided that the Kings had formally executed the Building Contract in their personal capacity, and not in their capacity as Directors of Meridian Estates Pty Ltd.

This meant that the Kings owed the Owners warranties as the quality of work done by Beach Constructions as set out in the Home Building Act.

Reason:

1. The building contract with Beach Constructions named the Kings as Principals.
2. Site meeting minutes of the development between Beach Constructions and the Kings ‘architect recorded that the Kings had signed the building contract.
3. The Kings financial lender required that a contract for the building work be signed before it would advance loan monies to the Kings, and these loan monies were eventually advanced to the Kings.

The development contained defective design work.

The issue was whether or not the Kings and Beach Constructions were liable for design defects even though the plans and specifications of the building work did not require Beach constructions to do any of the design work.

Examples of design defects: The design defects in this case included such things as missing handrails to stairs in the common areas that led to some apartments, a lack of thermal detectors in the car park and kitchens of some of the units and a lack of sprinklers in voids above bathrooms and so on.

Decision:

The statutory warranties under the Home Building Act are not inconsistent and the builder and developer are both liable to ensure that the work is carried out in accordance with the plans and specifications and that the work will comply with the law, the Australian Building Code and any applicable standards.

Reason:

1. When the development consent was obtained from the Local Council to permit the work that needed to be done to build the development, part of the development consent was that all of the work comply with the Building Code of Australia.
2. The potential inconsistency was with two of the statutory warranties which state that the work will be performed in accordance with the plans and specifications AND that the work will comply with the law.
3. The NSW Court of Appeal found that these two statutory warranties are not inconsistent because both warranties have to be fulfilled.

Whether or not builders and developers owe an Owners Corporations the same liability?

Decision:

The NSW Court of Appeal found that the scope of the liability of the builder and developer to an Owners Corporation for breaching statutory warranties under the Home Building Act, is the same.

Reason:

The NSW Court of Appeal decided that section 18C of the Home Building Act instigates the creation of a notional contract between the developer and the Owners Corporation in the exact same terms as the actual contract between the developer and the builder!

In Summary

The decisions of the NSW Court of Appeal in each of the above issues signal major game changers in building defects litigation in New South Wales.

If parties to a dispute similar to the facts of this case, fall within the required timeframe (being contracts entered into before 2014, and still fall within the statutory warranty time limit), both builders and developers can be held liable for design defects in residential building works even if those defects arise from the plans and specifications of the development.^*

This is a true win for Owners Corporations across New South Wales!

Strata Legal Solutions, by Streeterlaw, offers specific and tailor-made advice and representation for Owners Corporations across New South Wales. Strata Legal Solutions are specialists in commercial litigation and dispute resolution. Call us today on 8197 0105 to find out how we can best help you protect and defend your rights.

^*Important amendments to the Home Building Act 1989 saw the creation of a defence, under S18F, for builders to reasonably rely upon written instructions given by a relevant professional regarding the works to be undertaken and the defects are a result of that advice.

Written by Jamal Bakalian

After studying a double degree in Law and International & Global Studies at Sydney University, Jamal completed her GDLP at the College of Law. She is currently undertaking her Masters of Law (majoring in Commercial Litigation). Jamal has been practicing Law for 5 years. With a passion for resolving disputes, Jamal is a valuable member of the Commercial Litigation team at Streeterlaw.

Call us on 02 8197 0105 to book an appointment with Jamal Bakalian!