The NSW Court of Appeal handed down an important judgment last week in relation to the time to commence proceedings for damages arising from building defects. The judgment clarifies previous case law on the point and serves as a reminder to investigate the extent of building defects and identify all of the parties potentially responsible for the defects as early as possible after defects are noticed.
Limitation Act 1969 (NSW)
The time for commencing proceedings in any matter is limited under various pieces of legislation. The limitation period for taking action on any particular claim ranges from as little as 21 days and up to 12 years, depending on the nature of the claim. Pursuant to the Limitation Act, proceedings for breach of contract or negligence must be commenced within six years 'running from the date on which the cause of action first accrues'.1
The right to commence proceedings for debt or damages after the expiry of the limitation period is extinguished.2
The question in relation to the discovery of building defects is when does the 'cause of action' first accrue. For an action in negligence, a cause of action accrues on the first occurrence of damage or loss as a result of a breach of duty of care. However the answer can be particularly complicated when superficial defects appear months or years before the full extent of a latent building defect becomes apparent.
Previous case law has expressed the first accrual of such loss in different ways:
- When defects become manifest or are otherwise discovered3
- As soon as more than negligible damage is sustained4
- When the link between the physical manifestation and the underlying latent defect first becomes known or ought to be known5
- When the latent defect, and not merely the physical damage, is known or manifest.6
Depending upon the way in which building defects become apparent in any case, application of the tests outlined above can result in very different points in time from which a cause of action starts to run. In its most recent judgment, the Court of Appeal has sought to clarify the relevant test.
Cyril Smith & Associates Pty Limited v The Owners-Strata Plan 64970  NSWCA 181 (6 July 2011)
The case concerned an eight storey residential building at The Entrance on the NSW Central Coast. Construction of the building was completed and a strata plan registered in early 2001. By the end of 2001 water penetration had regularly caused damage to a number of units and the steel structure supporting the roof was rusting.
In 2005 the Owners Corporation commenced proceedings for damages against the builder. On 8 February 2008 the Owners Corporation was granted leave to join the architects, Cyril Smith & Associates Pty Limited ('CSA'). The primary issue for determination by the Court of Appeal was whether the six year limitation period had expired before proceedings were commenced against CSA. The relevant date for accrual of the cause of action was therefore 8 February 2002.
If the building defects were sufficiently apparent before that date, the owners' right to proceed against CSA was extinguished. It was not in dispute that both water penetration and rusting of the steel roof structure were patent and known to the owners prior to 8 February 2002. However at first instance, Chief Justice Bergin of the Supreme Court adopted a referee's report which drew a distinction between the visible signs of the physical defects and the cause of the defects. In that regard Chief Justice Bergin found:
'In this case the physical defect, the cracking in the walls and ingress of water was observable, but the latent defects, the faulty design of the windows ... were not identified until after 8 February 2002.'7
On appeal, the Court of Appeal held that at most, the previous case law was authority for the proposition that it is the physical defect and not that the cause of the defect, which must be identifiable for the limitation period to start running.
In this case, the Court of Appeal found that the relevant defect was not the ingress of water or the design, installation or inspection of the windows, but the windows themselves. Once the owners appreciated that the windows themselves were defective, in that they were not adequately watertight, the defect was known and the time for commencing proceedings had begun to run.
The Court of Appeal confirmed that it was not necessary for the owners to identify the cause of the defect, being the design by CSA. In fact the Court of Appeal accepted that knowing that the windows were defective did not mean that the owners knew who was responsible. However the time within which the owners needed to ascertain who was responsible and if necessary, commence proceedings, had started to run. Because the owners did not commence proceedings against CSA within six years from that time, the claim against CSA was statute barred.
The Court of Appeal have determined that knowledge of the existence of a physical defect is sufficient to start the limitation period running.
This issue appears to have been quite straight forward in the facts of the case before the Court Appeal, as it was accepted by the parties that the relevant defects were patent after a relatively short period of time.The Court expressly distinguished the facts of the case from matters involving latent defects which are not easily discoverable.
Unfortunately the decision does not clarify the extent to which a latent defect is required to be known for the limitation period to commence.
Where the nature of a building defect and the time of its discovery is in dispute, the start of the limitation period for commencing proceedings is still less than certain. What is certain is that it is not necessary to know the full extent or cause of a defect, or the parties responsible for the defect, for the time for commencing proceedings to start running. Given that investigations to discover the extent, causes and parties responsible for building defects can sometimes develop over years, it will be imperative for potential plaintiffs to start those investigations as soon as physical signs of damage are apparent.
1 Section 14(1) Limitation Act 1969 (NSW)
2 Section 63(1) Limitation Act 1969 (NSW)
3 Scarletta v Lettice  NSWCA 289
4 Sherson & Associates Pty Limited v Bailey &
Ors  NSWCA 275
5 Pullen v Gutteridge Haskins & Davey Pty
Limited  1 VR 27
6 Eko Investments Pty Limited v Austruc
Constructions Limited & Ors; The Owners Strata
Plan No 64970 v Austruc Constructions Limited &
Ors  NSWSC 208
7 At 
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.