Australia: Residential Focus – 26 September 2018: Part 1 - HWI Certificates obtained by fraud

HWI Certificates obtained by fraud, a cautionary tale of a vendor, his son-in-law and sham building contracts

In Carr v Miller (2018) NSWSC 1424, the New South Wales Supreme Court (the Court) considered whether a purchaser was deceived into completing a sale contract through (inter alia) the provision of fraudulently obtained home warranty insurance (HWI) certificates. The Court was further required to determine whether a subjectively innocent party could be vicariously liable for the deceit and whether a party claiming to be the builder can be estopped from denying the applicability of statutory warranties under the Home Building Act 1989 (NSW) (HBA).

Facts

The owner of a property (the Owner) made arrangements with his son in law (the Son-in-law) to undertake an extensive redevelopment of the property. When the works were substantially complete, the Owner agreed to sell the property to the plaintiff (the Purchaser). The Owner entrusted the entire process of carrying out the works and selling the property to the Son-in-law. The Son-in-law was not a licensed builder and could not be an owner-builder under the HBA.

Completion of the sale contract between the Owner and the Purchaser was subject to and conditional on the Owner providing evidence that all building work undertaken on the property was covered by a HWI policy.

The Purchaser's claims

The Purchaser claimed she was deceived into completing the sale contract by the provision of false certificates of HWI. The Purchaser submitted that but for the provision of the false certificates, she would not have completed the purchase. The Purchaser quantified her loss as the difference between the purchase price paid and what was the true value of the property, due to defective building work.

The Son-in-law maintained that a builder (the Alleged Builder) completed the building work on the property because the Alleged Builder had supervised (although neither as an employee or a sub-contractor to him) a person who had done some of the work, for the Son-in-law.

Claim of deceit against the Owner and the Son-in-law

The Court found that the Alleged Builder did not carry out the works. In substance the works were carried out by the Son-in-law.

The Court found that the Alleged Builder and the Son-in-law prepared and backdated three sham contracts for residential building work on the property. The contracts were created for the purpose of persuading the HWI underwriter to issue certificates of insurance, which covered work to be carried out by the Alleged Builder as builder and the Son-in-law as owner. The Alleged Builder and the Son-in-law knew that the HWI certificates were procured by knowingly false representations made to the insurer.

The Court held that by providing the HWI certificates to the Purchaser, the Son-in-law made an implied false representation that the building work was covered by a HWI policy in accordance with the sale contract. The Son-in-law knowingly made the false representations to the Purchaser to induce her to complete the sale contract, which the Purchaser relied on.

The Court acknowledged that the Owner was not personally involved in and had no knowledge of the Son-in-law's actions. However, the Owner entrusted the performance of the building works and the provision of HWI certificates to the Son-in-law, with the inevitable conclusion that the Son-in-law was the Owner's agent. The Owner was therefore liable for the consequences of the Son-in-law's actions. For the same reasons, the deceit claim against the Son-in-law also succeeded.

Breach of statutory warranties claim against the Alleged Builder

The Court was required to determine whether the Alleged Builder was liable for work done in breach of the warranties under section 18B of the HBA.

The Court found that the Alleged Builder was estopped from saying that he did not perform the building work subject of the contracts. That estoppel was found to arise, notwithstanding that the contracts were shams, created solely for the purpose of obtaining HWI certificates to induce the Purchaser to complete the sale contract. The Court held that it was too late for the Alleged Builder to resile from the represented state of affairs.

The decision is a cautionary tale for those who develop property using unconventional contractual arrangements and/or unlicensed builders and yet notwithstanding, seek to cloak those arrangements with a veneer of compliance with the HBA.

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