Domestic Builder Statutory Warranties – What are they and why are they important for consumers?

Domestic Builder Statutory Warranties – What are they and why are they important for consumers?

14 Oct 2020

By Justin Cotton, Director, and Jordan Davies, Senior Paralegal, Lovegrove & Cotton – Construction and Planning Lawyers

In a number of states and territories in Australia, legislation mandates the inclusion, in contracts for domestic building work, of certain promises or ‘warranties’ made by the builder to the consumer in respect of building work carried out under the building contract. Such regimes have been in place now for many years, with the Victorian regime under the Domestic Building Contracts Act 1995 (VIC) (‘DBCA’) being around for some 25 years.

This article discusses the importance of these statutory warranties and their centrality to much of modern day domestic building litigation. By way of comparative analysis this piece highlights some of the issues faced by consumers in New South Wales as compared to Victoria and the ACT, and vice versa, particularly with regards to the scope of building works covered by such regimes.

Laissez Faire Contracting & the Problem for Consumers

Across Australia’s numerous industries, the legislatures of states, territories and the Federal Government have often seen fit to draft consumer protection regimes to protect vulnerable consumers against the likes of unfair and overbearing contract terms. Legislation such as the Australian Consumer Law, the Legal Profession Uniform Law, Residential Tenancies Acts, and so forth, all impose requirements upon contracts, including, inter alia, implied statutory terms, required procedures for termination, and so forth.

The reason this is often seen by parliaments across Australia as necessary is because consumers often lack equivalent bargaining power to service and goods providers, and other commercial operators. In an ideal totally free-market world, market competition would be sufficient to ameliorate harsh or unfair contract terms, as there would be no monopolies and the ideal consumer would be prudent, have an eye for contractual detail, and would therefore ‘shop around’ to ensure they got the best contractual terms they could. Of course, this rarely ever happens.

Contracts are often incredibly hard to understand. Consumers, and people generally, are usually time-pressed and do not have the energy to pry through the terms of sale of their new iron or steam machine. Industries are often adorned by huge corporate leviathans that dominate, or even have a monopoly or duopoly.

Furthermore, commercial savviness dictates that commercial providers of goods or services minimise risk, so such providers, even in a market where there is competition, will often have similarly harsh contracts seeking to allocate as much risk as possible to the consumer. The consumer, then, is at a huge bargaining power disadvantage, and the nature of unregulated markets reinforces this reality.

So usually, in Australia, the only context in which two parties can bargain entirely on their own terms is the commercial sector where two commercial parties are contracting, as they are each deemed commercially sophisticated enough to protect themselves from risk arising from a contract.

It follows that in the building industry, residential owners of property are usually afforded certain statutory protections to ameliorate the harshness of bargaining power disparity. But this does not mean that all “vulnerable” consumers of as-built product are protected.  In the below comparative analysis of Victoria and New South Wales, it will be apparent that certain vulnerable consumers can be left bereft of protection.

Victoria – The Domestic Building Contracts Act

In Victoria, the Domestic Building Contracts Act 1995 (VIC) (‘DBCA’) regulates the contents of domestic building contracts by implying into every domestic building contract to which it applies certain terms as regards consumer warranties, access to building sites, restrictions on contents of contracts, mandating a cooling-off period, procedural requirements (such as for variations, extensions of time etc) after the contract is signed, and so forth. For the purposes of this paper, the focus will be on the statutory warranties.

Part 2, Division 1 of the Domestic Building Contracts Act provides for the implied domestic building warranties in domestic building contracts and provides that such warranties “run with the building”, which means that subsequent owners can avail themselves of the consumer warranties as if they were party to the contract themselves.[1] The implied consumer warranties under the Domestic Building Contracts Act are as follows:-

The following warranties about the work to be carried out under a domestic building contract are part of every domestic building contract—

(a)     the builder warrants that the work will be carried out in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract;

(b)     the builder warrants that all materials to be supplied by the builder for use in the work will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new;

(c)     the builder warrants that the work will be carried out in accordance with, and will comply with, all laws and legal requirements including, without limiting the generality of this warranty, the Building Act 1993 and the regulations made under that Act [4] ;

(d)     the builder warrants that the work will be carried out with reasonable care and skill and will be completed by the date (or within the period) specified by the contract;

(e)     the builder warrants that if the work consists of the erection or construction of a home, or is work intended to renovate, alter, extend, improve or repair a home to a stage suitable for occupation, the home will be suitable for occupation at the time the work is completed;

(f)     if the contract states the particular purpose for which the work is required, or the result which the building owner wishes the work to achieve, so as to show that the building owner relies on the builder’s skill and judgement, the builder warrants that the work and any material used in carrying out the work will be reasonably fit for that purpose or will be of such a nature and quality that they might reasonably be expected to achieve that result.

It follows that the statutory warranties under the Domestic Building Contracts Act provide a number of grounds under which a consumer (being an owner or a subsequent owner) can sue for breach of a contractual warranty. If a successful claim is made out, damages will usually be awarded to compensate for the costs of rectifying the breach, usually defective building work. Of course, this is a very litigious field and requires the involvement of an experienced construction lawyer, along with technical experts to ensure such a claim is properly made out.

New South Wales – The Home Building Act

New South Wales has an equivalent set of domestic building warranties outlined under the Home Building Act 1989 (NSW) (‘the Home Building Act’). They are as follows:-

1)  The following warranties by the holder of a contractor licence, or a person required to hold a contractor licence before entering into a contract, are implied in every contract to do residential building work—

(a)  a warranty that the work will be done with due care and skill and in accordance with the plans and specifications set out in the contract,

(b)  a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new,

(c)  a warranty that the work will be done in accordance with, and will comply with, this or any other law,

(d)  a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time,

(e)  a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling,

(f)  a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the contractor licence or person required to hold a contractor licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder’s or person’s skill and judgment.

(2)  The statutory warranties implied by this section are not limited to a contract to do residential building work for an owner of land and are also implied in a contract under which a person (the principal contractor) who has contracted to do residential building work contracts with another person (a subcontractor to the principal contractor) for the subcontractor to do the work (or any part of the work) for the principal contractor.

It can be seen that warranties (a) thru (f) are, save for certain subtleties, reasonably similar to those contained under the Victorian regime.

Other states and territories such as the Australian Capital Territory have similar warranty provisions which are worded slightly differently but work to similar effect.[2]

Operational differences between the varying State and Territory Acts usually do not arise out of the wording of the statutory warranties per se, but rather the scope of building work to which the warranties apply.

Building Work to Which these Acts Apply

An important aspect to consider with any consumer protection regime is: “who is in?” and “who is out?”, namely to whom the statutory protection applies, and to whom it does not. This has been a significant area for Australian legal analysis, and has played out prominently in New South Wales.

Under the Home Building Act “all residential parts of a hotel or motel” and “a house or unit designed, constructed or adapted for commercial use as tourist, holiday or overnight accommodation”, amongst other things, are excluded from the definition of “dwelling” and therefore excluded from the definition of “residential building work” and thus excluded from the Home Building Act and its statutory warranties. It follows that the likes of serviced apartment investors, hotel companies and other commercial actors are excluded from protection under the regime.

The consequences of this reality were borne out in the case of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36.  This concerned a situation where serviced apartment owners and the Owners Corporation for the Serviced Apartment component of the multi-purpose residential building attempted to sue a Builder for defects in the common property, and failed in doing so, even in negligence (see article here on Brookfield and the new statutory duty of care in NSW, and here for a general understanding on why statutory warranties are significant for negligence claims). The residential Owners Corporation, contrastingly, settled its claim with the Builder in respect of the residential component of the building and associated common areas prior to trial.

A similar distinction between commercial components of a mixed-purpose building and residential components of a mixed-purpose building is also reflected under the Victorian Domestic Building Contracts Act.[3]

Varying Limitation Periods in Jurisdictions such as NSW and ACT

Under the Home Building Act, components of a building or structure such as filtration systems in pools, water heaters and coolers, refrigeration, air conditioning and plumbing are expressly included within the definition of ‘residential building work’.

In New South Wales, there is a distinction between “major building defects” and other types of defects, which determines the period within which a claim must be made under the statutory warranties under the Home Building Act.[4] So in New South Wales it does not matter whether a defect pertains to the likes of a filtration, ventilation or plumbing system vis-à-vis a structural component; rather, it depends on the severity of outcome and, amongst other things, the consequential habitability of a component of a building.

Contrastingly, in the Australian Capital Territory, the variation in limitation period is dependent on whether the defect is structural or not structural.[5] This means that if one is an owner of an apartment in a tower that suffers a ventilation issue culminating in condensation, and perhaps even mould, one will need to make a claim within 2 years of the Certificate of Occupancy and Use (instead of the 6 years that would apply to structural faults), despite the fact that the defect may have culminated in a residence being uninhabitable.

In Victoria, perhaps helpfully (for simplicity’s sake), there is no distinction between types of defects and associated limitation periods – the standard building industry limitation period applies, which is 10 years (in order to commence a ‘building action’).  So in some senses, the Victorian regime is more consumer-friendly.

Conclusion

In many circumstances, such as building work for a stand-alone residential suburban home, the applicability of the statutory warranties will be relatively clear. However, in multi-purpose residential and commercial buildings, the scope of these kinds of statutory protections can be less clear.  Furthermore, in jurisdictions such as New South Wales and the Australian Capital Territory, depending on the kind of defect one is dealing with, the opportunity for redress under those jurisdictions’ schemes may vary.

In circumstances where statutory warranties do not apply, it may be very difficult, if not impossible, for a claim to be made out alternatively in negligence (save for in New South Wales which has new legislation on point).   It would depend on being able to prove a duty of care existed, that the duty was breached, and that the injured party relied on the duty being adhered to and did not have other means of protecting themselves from the breach.  Also, where one is considered to be a commercial actor outside the scope of the warranties, one could sometimes be expected by a Court to have protected oneself by negotiating appropriate contractual terms.

It follows that whether one is a commercial investor in a multi-purpose or commercial building in need of contractual protections, an owner or Owners Corporation dealing with defects seeking to claim under a statutory warranty regime, or a builder facing a claim under residential statutory warranties, it will be important to consult an experienced construction law firm that is familiar with the varying domestic building statutory warranty regimes across the country.

This article only contains examples of some of the many variations between Victoria, NSW and the ACT’s respective domestic building contract legislation and is by no means exhaustive, only illustrative. It follows that nothing contained with this article should be construed as legal advice.

[1] See Domestic Building Contracts Act 1995 (VIC), s 9.

[2] See the Building Act 2004 (ACT), s 88.

[3] See Section 5 and Section 3 – definition of “home”.

[4] See Section 18E of the Home Building Act 1989.

[5] Building (General) Regulation 2008 (ACT), regulation 38; Building Act 2004 (ACT), s 88(4).