But I built to the plans and specifications! Design defects in buildings. 

Developers and builders are now potentially liable for design defects in buildings, that’s the key takeaway from the recent NSW Court of Appeal decision The Owners – Strata Plan No 66375 v King [2018] NSWCA 170.

A recent NSW Court of Appeal decision has allowed an appeal by an Owners Corporation against the developers in relation to whether they were liable for design defects in buildings.

The Court of Appeal held that previous owners of the land were considered to be developers under the Act and were liable for the defective building works as a result of design defects. The factual background of the case provides a cautionary tale for developers where they use a separate entity to undertake construction works to the entity that owns the land – a common scenario where financiers do not require the land to be included in the equity for the development. It is critical to ensure the contracting party is suitably clear.

The development involved the conversion of a warehouse owned by Mr King and his mother Mrs King (the Kings). The construction occurred between 2000 and 2001 by Beach Construction Pty Ltd (the Builder). The developer was the related Meridian Estates Pty Ltd (Meridian) with the Kings being the directors. Home Warranty Insurance was provided by Suncorp Metway Insurance Pty Ltd (Suncorp).

Supreme Court proceedings

The Owners Corporation commenced proceedings in 2007 against the Kings, Suncorp, the Builder and Meridian in relation to alleged building defects at a property.

The primary judge dismissed the claim by the Owner’s Corporation against the Kings on the basis that the Kings were not developers as defined by s3A of the Home Building Act 1989 (NSW) (the Act) as they were not parties to the relevant building contract and Meridian had entered into the contract as agent for the Kings. The primary judge had also held that even if the Kings were the developers, the Kings would be not liable for design defects in the warehouse conversion building as the builder was also not liable for those defects – as they stemmed from defective design.

Both Meridian and the Builder were in liquidation, and Suncorp had settled proceedings – this left the Owners Corporation with the sole potential party being the Kings in their personal capacity.

Court of Appeal

The Owners Corporation appealed and submitted that the Kings were in fact parties to the building contract and that the Kings should have been liable for the design defects.

The court of appeal allowed the appeal ruling that based on the facts of the case (payments, directions, meetings etc. with the Builder and relevant parties) the likely inference was that the Kings had formally executed the building contract in their personal capacity not in their capacity as directors of Meridian.

The work performed by the Builder included defects. These defects were found to be design defects, built in accordance with the plans and specifications prepared by the Kings’ architect. The key legal question (in contrast to the question of capacity above) to be considered by the Court of Appeal was whether the Builder and therefore the Kings were liable for design defects even though the plans and specifications of the works did not require the works to be undertaken.

The Court of Appeal needed to consider the obligation for builders and developers to comply with the statutory warranties in s18 of the Act, namely, the operation of the potential conflict under s18(1)(a) and s18(1)(c). The conflict existing as the Act requires a builder to comply with both, “the plans and specifications set out in the contract” and “in accordance with, and will comply with, this or any other law”. A conflict exists where the plans and specifications prepared by a third party (often engaged directly by the developer) do not comply with the relevant law, code, or standards.

The Court held that the Builder (and therefore the Kings as developers) were required to satisfy their obligation under s18(1)(c) of the Act and warrant that the works the builder undertakes on the direction of the relevant professional (engineer, architect etc.) is in compliance with the law, code, standard etc.

This is an onerous task for any developer or builder, considering they would engage the relevant professional with an expectation that their works would comply with the law, codes and standards the subject of their works.

The Court of Appeal set outside the primary judgment and had ordered the judgment for the Owner Corporations in the sum of $5,093,168.09 with costs.

It should be noted that this factual scenario only exists in contracts entered before 2014 for which a claim for a breach of statutory warranties is made, as s18F created the defence to rely upon a professional who provides advice regarding the works to be undertaken and the defects are a result of that advice.

Implications for builders, owners and developers

If the parties to a dispute fall within the required time frame (being prior to 2014 amendments, while still within the statutory warranty time limit) both builders and developers can be held liable for design defects in residential building works even if those defects stem from the plans and specifications.

The decision in this case highlights the risks to builders, as builders engaged in a construct only contract may be potentially liable for design defects. The distinction between ‘design defects’ and ‘construction’ defects have diminished and completed residential building works may not conform to each and all of the statutory warranties. This will also increase the risk exposure to insurers who have written policies to cover breaches of implied warranties under s18B(a) of the Act, but not factored in the risk profile of s18(c).

If you have any questions regarding the implications of this case and how it may affect you, Morrissey Law & Advisory are available to discuss.

This article was prepared by Hamish Geddes.


Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.