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Residential Focus – Part 1: Breach of contract for building defects – Construction & Planning



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Breach of contract in name, but not in limitation period

Two years is a short time in the life of a building and
anecdotally, the sweet spot for the manifestation of defects is the
two to three-year mark from completion. Two years from completion
is, of course, the period within which a claim for a breach of
statutory warranty may be brought under the Home Building Act 1989
(Act) and it would surprise few that many owners
would struggle to meet this deadline, whether by virtue of their
awareness of the defects, or their awareness of their rights.

If the defects can’t meet the criteria for a major defect,
attracting a longer statutory warranty period of six years, this
leaves owners searching for an alternative cause of action.

One has recently been presented by virtue of the statutory duty
introduced by the Design and Building Practitioners Act 2020, but
what about breach of contract? With many contracts expressly
including the statutory warranties, why would it not be feasible to
sue for breach of contractual warranty and obtain the benefit of
the six-year limitation period under the Limitation Act 1969?

The Supreme Court has now answered that very question and has
done so in the negative.

Background

The owners entered into a residential building contract dated
January 2016 with the builder. The builder left the property in
April 2017, with the work incomplete.

In August 2019, the owners commenced proceedings in the NSW
Civil and Administrative Tribunal against the builder. Those
proceedings were transferred to the Local Court in July 2020.

In the Local Court, the owners claimed damages for breach of
contract, claiming that the builder had breached express warranties
in the contract. Those express warranties mirrored the statutory
warranty found under section 18B of the Act and were required to be
included in the contract in accordance with section 7(2)(f) of the
Act.

The builder relied on a defence that the proceedings had been
filed beyond the two-year statutory warranty period for defects
other than major defects.

The owners argued that their claim was for a breach contract,
where the relevant terms were worded similarly to the warranties in
section 18B, rather than importing the statutory warranties and the
other provisions in Part 2C of the Act. On the owners’
construction, their claim for breach of the contractual warranties
had a limitation period of six years, as provided by section
14(1)(a) of the Limitation Act 1969 (Limitation Act).

The Local Court found in favour of the owners and the builder
was ordered to pay damages and costs. The Court’s reasoning was
as follows:

  • the builder agreed to make warranties to replicate the
    statutory warranties in section 18B of the Act

  • as the builder did not include in the contract the limitation
    in section 18E of the Act, his warranties were not so limited

  • a claim for breach of statutory warranty is not a claim for
    breach of contract

  • as the warranties were expressed in the contract, the
    owners’ claim was a claim for breach of contract (or, breach of
    a contractual warranty) and not a claim for breach of statutory
    warranty.

The builder appealed the decision to the Supreme Court of
NSW.

The appeal

The builder brought the appeal on several grounds, which
relevantly included that the Court below erred in construing clause
39 of the contract, which incorporated the statutory warranties
which applied pursuant to section 18B of the Act, by concluding
that the statutory limitation period of two years to bring claims
for defects other than major defects did not apply, but rather, the
limitation under section 14(1)(a) of the Limitation Act 1969 (NSW)
of six years from the date of breach of contract applied.

The Supreme Court considered that it was clear that the
statutory warranties were not meant to be subject to any limitation
period other than that which appears in section 18E of the Act. It
emphasised that the warranties clause in the relevant contract
contained the following qualifying statement: “To the extent
required by the Home Building Act, the builder warrants
that:”, which supported the submission that the limitation
period of two years for defects other than major defects, as set
out in the Act, would apply, and not the limitation for an action
of breach of contract, being six years from the date of the
breach.

The Supreme Court found that, if the Court below’s
construction of the clause was preferred, it would mean that a
builder who complied with the requirement of section 7(2)(f) of the
Act by expressly including the warranties implied by section 18B
into the contract, would be in a worse position than a builder who
was party to a contract that did not contain warranties in its
written form. Accordingly, a builder who had not expressly included
the warranties would be entitled to rely on section 18E of the Act,
but one who had would not be.

Ultimately, the contract should be read in light of the Act,
whereby expressly including the warranties, as is required by the
Act, should not be taken to lengthen their application from the
baseline of the Act.

The Supreme Court also found that there was no sensible
distinction, in these circumstances, between an action for
“breach of statutory warranty” and an action for
“breach of contract” to make the Court below’s
construction compelling. Whilst it may be accurate to describe Part
2C of the Act as “consumer protection legislation”,
ultimately the limitation periods exist to provide a level of
certainty, not only to owners, but also to builders. This is
reflected in section 18G of the Act, which seeks to protect the
rights of a “person” under the Act, which reference was
found not to be specific to the owner, but may also include the
builder.

The way ahead

It is not yet known if the matter is to be subject of an
appeal.

The Supreme Court has made it clear that the statutory
warranties remain unmodified in their operation (or their
limitation) by virtue of express inclusion in a contract. Put
another way, a breach of a warranty which is included in a
contract, that is required to be included in the contract and
mirrors the warranties included in section 18B of the Act, must be
read with the Act. A breach of those warranties will not give rise
to a breach exclusively in the contract. That breach will be
considered in light of the Act and the other applicable provisions
in Part 2C of the Act.

The door may have been left open for owners to negotiate
warranties which are separate, bespoke and distinct from the
statutory warranties, which may attract the six-year limitation
period for a breach of contract, regardless of the nature of the
defect. Clear and unequivocal drafting would be required, to
demonstrate that the parties intended for the additional warranties
to apply in addition to and over and above those in the Act.

This publication does not deal with every important topic or
change in law and is not intended to be relied upon as a substitute
for legal or other advice that may be relevant to the reader’s
specific circumstances. If you have found this publication of
interest and would like to know more or wish to obtain legal advice
relevant to your circumstances please contact one of the named
individuals listed.



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