By Justin Cotton, Partner, Construction and Practitioner Advocacy, Lovegrove Smith & Cotton, Construction and Commercial Lawyers
As many of you will already know, the builder warranties that a domestic builder gives to an owner run effectively for 10 years, which is the period of time within which a party can initiate a building action. And these warranties, set out in section 8 of the Domestic Building Contracts Act 1995 also “run with the land”, so that a subsequent or future owner can also be protected provided the 10 years has not expired.
This 10 year period is not to be confused with the length of time that domestic builder insurance will protect owners if the builder goes broke, dies or disappears. However, that is a topic for another article.
For domestic building, the building action will need to be brought at VCAT. Again, this will not be news for most people by now. But what is to happen if a subsequent or future owner decides to bring a new claim against a builder for breach of warranty, at some future time after the builder has already reached a settlement with the first owner in regard to the same defects on the same land?
By virtue of section 9 of the Domestic Building Contracts Act 1995 (“the DBCA”) it is prescribed that “any person who is the owner for the time being of the building or land in respect of which the domestic building work was carried out under the contract may take proceedings for a breach of any of the warranties listed in section 8 as if that person was a party to the contract.” This then preserves a right for subsequent or future owners who acquire the land from the original owner that had the contract with the builder.
This is a right to sue the builder for defective works (ie a breach of the “section 8 warranties”) even though this new owner did not have any contract with the builder. It could of course happen quite a few years after the works are completed, with potentially a building action being brought against the builder in the ninth or tenth year after completion of the works.
The date for completion of the works is generally gauged as the date that the works are issued with an occupancy permit or (in the case of renovation works) a certificate of final inspection from the building surveyor, with the 10 years running from that date.
In practice, such late claims by new owners (or even original owners) more than 5 years after completion will be relatively rare, as most building defects will have well and truly manifested by then. Nevertheless, the spectre of such belated actions hovers sinisterly within the realms of possibility for most builders.
Having appeared at many a VCAT mediation or compulsory conference, and also prepared terms or deeds of settlement in the comfort of the office, I can vouch for the conventional ‘release’ that is given to builders by owners when a domestic building dispute is resolved or settled. The most common expression of such disputes is a claim for payment by a builder and a cross-claim for defective works by the owner, or vice versa.
Generally the release given will be to the effect that (regardless of which way the settlement payment is flowing), the parties agree that the Terms as signed will contain a full and final settlement of all matters in dispute, including any claims for defects or warranty breaches that are currently known to the parties or should reasonably be known to the parties at the date the Terms are signed.
Therefore the release given to the builder would include a settlement of all defects raised or argued as part of the VCAT proceeding, including those contained in any consultant reports or points of claim / counterclaim. It would not include any later causes of action for ‘latent’ or hidden defects, ie those problems that the owner could not reasonably know about at the time of agreeing to the settlement because of their ‘latent’ or hidden nature.
This limited release is consistent with section 10 of the DBCA. This section states that a provision of any agreement that purports to remove or restrict a right to take proceedings for breach of a section 8 warranty, is void to the extent it applies to a breach other than one that was known, or ought reasonably to have been known, to the person to exist at the time the agreement was executed.
There is a school of thought also that such Terms of Settlement should not take away the right of future owners who are not part of the current proceeding and who have a right, independent of the first owner, by virtue of section 9 of the DBCA.
However, I would argue that this argument for future owners is seriously weakened by statements made by the honourable VCAT Member in the case of Delic & Others v Yahome Pty Ltd  VCAT 752. This is despite the fact that the final conclusion of that decision was that the Applicants’ rights as subsequent owners had not been compromised by reason of any settlement agreement between the builder and the vendor (the original owner).
Every case must be decided on its own facts, and the important aspect of the Delic decision are the expressions of principle made by the Tribunal, including as follows:
“In my view, a settlement agreement between an original owner and its contracting builder could affect the rights of a subsequent owner. Although s.9 of the Act gives a subsequent owner rights commensurate with the rights of the original contracting party, it does not create rights greater than the rights of that original contracting party.” (Paragraph 40 of the decision).
“If the Vendor compromised her rights with respect to certain defects, then I do not accept that a subsequent owner is able to reignite those rights in reliance upon s.9 of the Act. In my view, the final words in s.9 of the Act, which state as ‘if that person was a party to the contract’ [emphasis added] are words which limit the operation of s.9 to effectively put a subsequent owner into the shoes of the original contracting party.” (Paragraph 41).
The upshot of this rationale by the Member was that if the original owner had compromised its ability to claim for a breach of a section 8 warranty under a settlement agreement, then subject to section 10 of the DBCA no further action lies against a builder in respect of that particular breach. This is consistent with the builder’s expectation and right to be free of liability in respect of the matters so compromised by the owner in the settlement.
This does not necessarily remove the rights of a subsequent owner and in fact would only affect their claim if any against the builder, in circumstances where they have no direct contract with the builder. The new owner may very well still have a claim against the vendor / original owner and in particular under any sale agreement for the land.
It is argued however, that unless the new owner can maintain that the defects now complained of could not have been reasonably known by that new owner to exist at the time of the terms of settlement, or unless they can show that such defects were not part of the terms of settlement, then the logical conclusion is that the new owner ought to legally respect the release given to the builder.
As it happens, in Delic the Member was not satisfied that the release in the specific settlement agreement was specific enough to show what the ‘previously identified defects’ were, and the builder had already acted inconsistently with the notion of a full release by going back to rectify some of the defects. Therefore, once again we need to look at the specific facts and the relevant settlement agreement, to see whether the principles will apply to a unique fact situation.
If builders need advice on their rights and how best to take action to protect themselves, or if they suspect a dispute is a distinct possibility, they should seek prompt assistance from construction lawyers.
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