Gaps in coverage by the Home Building Act for “As If” contracts

28/09/2018

The NSW Home Building Act, 1989 is a piece of legislation designed to protect Home Owners from defective building works.  When parliament passed the legislation into law it recognised that Owners were at a disadvantage when dealing with Builders.  The Act achieves this protection firstly by providing that in all Residential Building Contracts there is an implied promise that the work will be not defective. This promise is called a Statutory Warranty.  The warranties are set out in section 18B of the Act. If the work is defective the Owner can claim a breach of promise under section 18B and recover from the Builder the losses (subject to limited defences that are available to the Builder).  In order to proceed, the Owner must have entered into a Contract with the Builder.

There are however, many situations where the Owner cannot recover from the Builder. These situations occur for example, if the Builder is insolvent, has disappeared or has passed away.  In these cases the Owner could not proceed to recover against the Builder under section 18B.

If there is Builders Warranty Insurance (previously known as Home Owners Warranty Insurance) the Owner may have a claim against the insurer.

Further in such situations the Home Building Act will still operate to allow the Owners to recover by permitting the Owners to proceed against other people as if the Owners had a building contract with those other people.  The Home Building Act provides that an Owner who has a defective house can still claim his or her losses for breach of section 18B against people even though there was no contract with those people.  The Home Building Act sets up an imaginary contract or “notional contract” and states that this gives the Owner the right to sue those people liable under the “notional contract”.

This “notional contact” will operate against a limited class of people, which class is set out in section 18C of the Act. Those people include an owner-builder, a holder of a contractor licence, a former holder of a contractor licence or a developer who has undertaken building work. Where an Owner is the successor in title to one of those people, the Act establishes a “notional contract” between that new Owner and those people so that the new Owner can sue one of those people as if there is a building contract.  This will help the new Owner who can sue under section 18B of the Act to recover losses caused by defective building work in those situations.

The problem however is that there are still situations where a new or subsequent Owner acquires a property which had defective building work and the new Owner cannot recover against any person for the defects, despite sections 18B and 18C.  Such a situation occurred in a recent Supreme Court case in which we acted for the subsequent Owner.  In that case the Owner of a property allowed his son-in-law to redevelop a house by carrying out extensive building work. The building work was carried out by the son-in-law, who was not a licensed builder. The building work was defective. Once the work had been done, the Owner sold the property to the new Owner. The new Owner discovered the defects and sued the unlicensed builder. The unlicensed builder did not have a building contract with the new Owner and so she could not proceed under the contract.  She sought to recover on various bases including under a “notional contract” under section 18C against that Builder and the previous Owner. However neither the unlicensed Builder nor the previous Owner fell within any of the class of people one could sue under section 18C since neither was a holder of a contractor license, a former holder, a developer or an owner-builder.  In the end result, the new Owner could not recover against the Builder for the defective building work on this basis.  The new Owner however succeeded on other bases for her losses.

What this case establishes is that the Home Building Act has some limitations in terms of protecting Home Owners who acquire properties with defective building work.

When it comes to defective building work in some instances, the consequences can be crippling and a costly unforseen exercise.  At Watson & Watson our experienced Building & Construction Solicitors can assist you with your building disputes.  Please contact Richard Watson Accredited Specialist Building & Construction or his Personal Assistant Shereen Da Gloria to discuss your matter and seek advice on your rights and how you can recover the costs of defective building work.

This is only a preliminary view and is not to be taken as legal advice without first contacting Watson & Watson Solicitors on 02 9221 6011.