Court of Appeal holds developers and builders liable for building defects

developer problems

In the Owners—Strata Plan No 66375 v King [2018] NSWCA 170, the Court of Appeal considered a number of issues including the vexed question of liability for design defects.

In allowing the Owners Corporation’s appeal against developers, the Court determined that both developers and builders will be liable for design defects in buildings where the relevant contract was entered into before 15 January 2015.

This key finding gives welcome certainty in this area but has onerous consequences for builders and developers alike.

The Court of Appeal considered several other issues including the scope of the section 18 C    notional contract between developers and home owners.

Details

In 1990 David King and his mother acquired land housing a 1928 warehouse complex in Camperdown.  A few years later, the Kings, as sole directors of Meridian, a development company, converted the warehouse to a mixed residential and commercial strata scheme.

The conversion works were performed by a builder, Beach, engaged under a contract by Meridian and allegedly executed by the Kings personally.  The Kings provided the design and Suncorp Metway the Home Warranty Insurance.

Significant defects and non-compliant work later emerged, including to waterproofing and fire safety systems.  Non-compliance of the work with the law was the result of design defects.

The Owners Corporation, as a successor in title to a developer, enjoyed the benefit of the s18B Home Building Act statutory warranties against both the builder and the developer.  So, in 2007, the OC sued the Kings, Meridian, Beach and Suncorp in the Supreme Court for breach of the statutory warranties.

Findings at first instance

His Honour Justice Ball found the Kings were not developers under s3A of the HBA because they were not parties to the building contract as individuals.  Ball J then held that even if the Kings were developers they could not be liable for design defects because the builder was not liable.

By the time of the OC’s appeal both Meridian and Beachwere in liquidation. Suncorp had settled the proceedings leaving the Kings as the only possible respondents.

Appeal Findings

The OC appealed on 4 grounds.

First, grounds 1 and 2 argued that the Kings were in fact parties to the contract as individuals and therefore developers subject to the statutory warranties.

Second, grounds 3 and 4 argued that the builder was liable for design defects and thus so were the developers under the notional contract.

Grounds 1 and 2 were allowed unanimously.

Grounds 3 and 4 were also allowed. The Honourable Justice Ward, Chief Judge in Equity and the Honourable Justice White agreed that a developer was liable for design defects, although for slightly different reasons. Leeming JA dissented but did not reach an expressly contrary conclusion.

Design Defects

The Kings argued that the liability of a developer can be equal to but not greater than that of a builder.  In other words, if the builder was not liable, because it built to the plans, neither were they.

The Court considered the potential conflict between the warranties that the work will be carried out in accordance with the plans/specifications and that the work will comply with the law and decided that the warranties operated together. The work had to be built in accordance with the plans and the law.

The Court then reviewed a developer’s liability for design defects under the notional contract and concluded that developers were liable for defective work arising from their non-compliant plans under section 18C.

Ward AJ determined that a developer’s liability under the notional contract was not limited to that of the builder and it was liable for supplying the design.

White AJ found the notional contract between the developer and OC was on the same terms as that between the builder and the OC.  The work had not been built in accordance with the law and the developer was liable.

This decision affects developers and builders.  It may be that s18F may provide a defence where contracts post-date 15 January 2015, but that question has yet to be considered.

Download October 2018 newsletter (PDF) »


 Are you having problems with your developer or builder and defective building work?  

Clare Peacock is an experienced construction lawyer working on Sydney’s Northern Beaches. Clare provides practical, cost-effective building approval advice to property owners, builders and strata managers. Services include residential building disputesbody corporate issues and strata building problems.

Call 02 9452 9298  Send an Email  Online Enquiry

Tags: