How Long is a Builder “in the firing line” in a Building Action?

There was a time when a builder could be liable for defective workmanship for, at least in theory, an open ended amount of time.

Under the common law, cases such as Bryan v Maloney effectively gave claimants the ability to issue legal proceedings decades after works were completed. This was known as a ‘perpetuity’ exposure for builders.

Therefore under the former regime prior to the Building Act 1993, claimants had a limitation of 6 years from when either the damage was caused, or 6 years from when the damage was discernible.

The problem for builders was that many defects take more than 6 years to move from a latent problem to something overt or obvious. Some situations in various building cases in ‘common law’ countries involved defects that were discovered more than 10 years after building had finished, so from there a potential plaintiff would have another 6 years from when the defect became discernible, to bring a building action.

After the Building Act 1993 came into operation in Victoria (in 1994) a new section 134 introduced a new liability cap, to place a limit on the number of years that a building action could be brought against a builder or other building practitioner.

Section 134 of the Act reads: “Despite anything to the contrary in the Limitation of Actions Act 1958 or in any other Act or law, a building action cannot be brought more than 10 years after the date of issue of the Occupancy Permit in respect of the building work (whether or not the Occupancy Permit is subsequently cancelled or varied) or, if an Occupancy Permit is not issued, the date of issue under Part V of the Certificate of Final Inspection for the building work.”

This it was thought effectively replaced the 6 year limitation period in the Limitation of Actions Act 1958 in Victoria, which on first blush appears to be kinder to builders, but in practice can leave them with an exposure to owners’ claims ‘in perpetuity’ – depending on how long it takes for a defect to become discernible.

A period of 10 years was thought to be a sensible compromise for the liability cap in section 134, because most defects become observable by around the 6-7 years post completion – and there was plenty of international experience suggesting 10 years was a fair limit for the cap.

One point of contention for builders of course (and source of confusion) is that their builder warranty insurance for domestic construction only covers structural defects for 6 years post completion (or contract termination) and for only 2 years for non structural defects.

It needs to be remembered though that this warranty insurance can only be claimed upon by owners (not builders) and only when the builder has died, disappeared or become insolvent.

In other words, the insurance is to protect owners, not builders, but nevertheless there are calls from some quarters for consistency between the liability cap in the Building Act and the period of insurance coverage for structural defects.

A definition for “building action” (as referred to in section 134) is given in the Building Act at section 129, and it is said to mean: “an action (including a counter-claim) for damages for loss or damage arising out of or concerning defective building work”. In addition the definition of ‘building work’ is said in this section to include the design, inspection and issuing of a permit in respect of building work.

Some controversy has arisen in legal circles about whether section 134 creates an entirely new 10 year limitation period to bring a building action, OR whether it creates a ‘long stop’ beyond which the 6 year limitation periods for tort (e.g. negligent building) and/or breach of contract cannot extend.

Earlier VCAT cases, such as Thurston v Campbell [2007] VCAT 340 held that section 134 created an entirely new 10 year limitation period for Victorian building actions that replaced the 6 year limitation periods imposed by the Limitation of Actions Act. This is known as the ‘replacement’ interpretation.

In contrast, in a recent decision of the County Court, Justice Shelton moved in a new direction away from the earlier VCAT decisions, and instead favoured the ‘long stop’ interpretation. The learned Judge also ruled that section 134 only applies to claims in negligence. This would then rule out its application to claims for breach of contract or under the consumer legislation (e.g. the Fair Trading Act or the Competition and Consumer Act).

The case concerned is Brirek Industries Pty Ltd v McKenzie Group Consulting (Vic) Pty Ltd [2011] VCC 294. His Honour stated in part:

“My reading of section 134 is that it does not enable a building action to be brought when it might not otherwise have been brought. Rather, it prevents a building action from being brought, in negligence, outside the 10 year period referred to in the section. Its purpose is to limit the common law position where the limitation period only runs in negligence from when defects in the building work were first known or manifest…”

Justice Shelton then concluded that the 10 year cap in section 134 only applies to claims in negligence with respect to defective work and does not extend the 6 year contractual limitation period. On the face of it, this is a builder friendly interpretation, because it could lead to shorter limitation periods for building actions.

This decision is in stark contrast to previous construction law interpretation of the section and the earlier VCAT decisions, that have favoured the ‘replacement’ interpretation. It could be argued that the replacement interpretation is also supported by the definition of ‘building action’, which does not appear by its plain wording to limit itself to claims in negligence.

Notably the decision is currently under appeal to the Victorian Supreme Court and we will provide an update on this question when it has come to hand.

By Justin Cotton, Director, Lovegrove & Cotton.

 

Lovegrove & Cotton Lawyers to the Building Industry

For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Justin Cotton, likewise, is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his recent elevation to Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Council, for HIA Victorian Chapter. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy.

If you wish to engage the firm, feel free to contact us via our website or by emailing enquiries@lclawyers.com.au.