A recent decision of the NSW Supreme Court (Owners Corporation v Dasco Constructions) raises the interesting question whether residential builders are liable to subsequent owners for defective work performed by their subcontractors.
Builders are liable to owners for the defective work performed by their subcontractors under the terms of all of the standard form building contracts in use in the industry. This update looks at the legal position of subsequent owners who want to claim against builders for defective workmanship or materials.
Background in South Australia
Under the Building Work Contractors Act 1995 (SA) (“the BWCA”), warranties are implied into the contract between the owner and the builder. The warranties include, for example, that:
- the building work will be performed in a proper manner to accepted trade standards and in accordance with the plans and specifications agreed to by the parties;
- all materials to be supplied by the contractor for use in the building work will be good and proper;
- the building work will be performed in accordance with all statutory requirements.
If a builder breaches the warranties by performing defective work on the home, the owner will have a claim against the builder for breach of contract, including breach of the implied warranties.
The standard building contracts all include terms that make the builder solely responsible to the owner for defective work performed by the builder’s subcontractors. Builders then have to seek redress from their subcontractors but in the first instance are liable to the original owner under their contract.
The Dasco case looks at what happens when the owner sells the defective home to another party. Clearly, there is no contract between the builder and the subsequent owner. The subsequent owner cannot sue for a breach of the building contract.
The BWCA states that in the event that the owner sells the home to another party, the warranties are inherited by the subsequent owner. Therefore, the subsequent owner is entitled to claim against the builder under the BWCA for breaches of the warranties. Often, owners also claim that the builder was negligent in performing the defective works.
The NSW position and the recent decision
In the Dasco case, the subsequent owner brought a claim against the builder alleging that the builder had breached the statutory warranties when it built the apartments under a contract with the previous owner. The builder raised the defence of proportionate liability saying that it was not liable for the defects and that other parties (presumably its subcontractors) were liable instead.
The new owners applied to the Court to have the builder’s defence struck out on the basis that proportionate liability does not apply to statutory warranties under the NSW equivalent of the BWCA.
It is necessary to provide some background to the law as to proportionate liability. NSW and SA both have similar proportionate liability legislation. In SA, the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 provides that a defendant’s liability for damages may be limited to a fair percentage of the plaintiff’s total damages if the claim is an “apportionable claim”. The fair percentage is to be calculated by considering the extent of the contribution of the defendant and other wrongdoers to the harm suffered by the plaintiff.
In addition, in SA, section 72 of the Development Act 1993 can result in apportionment of liability for defective work where more than one person is liable for the defects. However, this section does not apply to breaches of the statutory warranties in the BWCA because subcontractors are not liable under the BWCA for such breaches.
The Dasco argument
The Court considered the application by the owners to strike out the defence of proportionate liability. The Court looked at the earlier decision of Justice McDougall in Owners Strata Plan v Brookfield Multiplex Ltd where he allowed the builder to defend a claim on the basis that its various subcontractors were concurrent wrongdoers. In that case, Justice McDougall said that the defence was not hopeless or doomed to fail. However, in that case, the owner had claimed that the builder was negligent as well as claiming breaches of the statutory warranties. It has always been the case that claims of negligence are subject to apportionment.
In Dasco the owners had limited their claim to a statutory warranty claim and not claimed in negligence. They had probably done so to try to prevent the builder relying on a defence of proportionate liability. However, the Court said that an owner cannot avoid the operation of proportionate liability, simply by pleading its case in a limited way, if the facts support a pleading of a more general nature.
If a builder is able to run a defence of proportionate liability, the legal cost of the owner’s claim is likely to significantly increase. Owners may well be discouraged from running such claims if they are likely to be faced with needing to simultaneously sue the various subcontractors who contributed to the defective work in their home.
The Court concluded that proportionate liability defences are available to builders when they are sued by subsequent owners for breaches of statutory warranty. Proportionate liability defences would not operate if the builder was sued by the original owner under their contract and had agreed in that contract to assume liability for all the defective work performed by its subcontractors.
The South Australian position
There appears to be no authority in SA on the point. However it is at least arguable now, based on Dasco, that once a residential property has been sold, the subsequent owners may face a proportionate liability defence if they claim against the builder for breaches of the statutory warranties under the BWCA.
Where a subsequent owner also sues in negligence, it may be open to the builder to defend on two bases. Firstly, on the basis that it employed competent and respectable subcontractors and that the owner should look to the subcontractors for compensation for rectifying defects. Secondly, the builder might point to the proportionate liability legislation and suggest that the owner should join the defaulting subcontractors to the claim.
If the facts support a proportionate liability defence, the legislation requires the builder to, as soon as practicable, provide to the subsequent owner information as to the identity of the relevant subcontractors and the circumstances that give rise to their liability. Owners who fail to act on that information will only be awarded a fair percentage of the damages they would otherwise be entitled to.
Builders facing claims from subsequent owners should consider whether a defence of proportionate liability is available on the facts.
If the Dasco case is followed in South Australia, it is likely to significantly increase the cost of litigation for subsequent owners seeking to claim for defective workmanship. If that occurs, it would not be surprising to see some intervention by Parliament to amend the law in order to prevent proportionate liability applying to claims for breach of statutory warranty.
Contributor: Tom Grace