The Owners – Strata Plan 80647 v WFI Insurance Limited t/as Lumley Insurance  NSWSC 1161
The Supreme Court of NSW has recently considered whether an Owners Corporation could recover from the insurer of a formerly bankrupt builder, following that builder's discharge. The Owners – Strata Plan 80647 v WFI Insurance Limited t/as Lumley Insurance  NSWSC 1161 concerned allegedly defective building work carried out in a residential strata development. The Court held that the insurer was not entitled to deny indemnity to the Owners Corporation despite the builder being discharged from bankruptcy prior to the claim being made.
In 2006, the builder entered into a contract for residential building work with a developer. Statutory warranties were implied into the contract by the operation of section 18B of the Home Building Act 1989 (NSW) (Act). It was alleged that the builder breached various statutory warranties in carrying out the building work under the contract. The Owners Corporation, as successor in title to the developer, was entitled to benefit from the statutory warranties by the operation of section 18D of the Act. A policy of home warranty insurance (policy) applied to the work.
The builder became bankrupt in 2009 after completion of the work and was discharged in 2012. The Owners Corporation subsequently claimed under the policy on the basis that it could not recover compensation from the builder.
The hearing concerned a separate question: was the insurer entitled to deny the Owners Corporation's claim due to the discharge from bankruptcy of the builder prior to a claim being made on the policy?
This question gave rise to two issues. The first issue was whether the Owners Corporation's claim against the builder was a debt or liability provable in the builder's bankruptcy such that it was released upon the builder's discharge. Section 82 of the Bankruptcy Act 1966 (Cth) states that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy. The controversy was whether the Owners Corporation's claim against the builder was a demand arising otherwise than by reason of a contract or promise. It was accepted that if the Owners Corporation's claim against the builder was not released, the insurer was entitled to deny the Owners Corporation's claim for indemnity.
The second issue was whether, if the claim against the builder was released, the insurer was entitled to deny the claim for indemnity. This depended on whether the Owners Corporation had suffered loss or damage in respect of which it could not recover from the builder because of the insolvency, within the meaning of the policy. The insurer contended that the definition of insolvent under the policy was expressed in the present tense, requiring the insolvency to exist at the time that the claim was made.
On the first issue, the Court reasoned that:
- the Owners Corporation is entitled to the same rights as the developer in respect of the statutory warranties implied into the contract
- the claim can be described as a statutory claim as the rights asserted are conferred by statute
- although the claim is not adequately described as a claim in contract, there is a strong connection between the claim and the contract which is more than mere background to the claim and provides the essential framework against which the rights and obligations can be determined.
The Court found on the first issue: In essence, the claim is a statutory variant of a claim to enforce a contract. Viewing the claim overall, I do not consider that its statutory element leads to the conclusion that it arises otherwise than by reason of a contract or promise.
Having found that the claim against the builder was released by the builder's bankruptcy and subsequent discharge, the Court considered the second issue and rejected the insurer's argument as to timing: The clause, read as a whole and adopting the ordinary meaning of the words used, requires that redress from a contractor is not obtainable because of the contractor's insolvency. The insolvency is not expressed to be limited to an existing state of affairs. The focus is upon the reason why redress is not obtainable from the contractor.
As the Court pointed out, the outcome on the first issue avoids the anomaly (if the insurer's position was accepted) that a claim by a developer against a formerly bankrupt builder would be released, but not a claim for the same defects by a successor in title.
The case is likely to be well received by Owners Corporations with home warranty insurance, however it closes off an avenue of redress for Owners Corporations of strata developments exempt from the home warranty insurance regime in circumstances where the builder has been discharged from bankruptcy. As the Court noted, there is at least the prospect of an interlocutory appeal on the separate question.
Proposed reform of strata laws
The NSW Government is engaged in a process to reform NSW strata laws, with the final round of public consultation now closed. Relevantly, the proposed reforms include developer bonds at 2% of the contract price to be paid into a bond account as a prerequisite for obtaining an occupation certificate and for developers to fund an inspection and report to be carried out and provided between 18 months and 2 years after completion. It is proposed that the building bond can be applied towards the costs of rectifying defects identified in the inspection and reporting process or otherwise refunded to the developer. More
Doonan v Ultra Modern Developments Pty Ltd t/as Eagle
Homes  NSWCATCD 85.
Defective building work, breach of statutory warranty, methodology of calculating rectification costs. More...
Vescio v Commissioner for Fair Trading, Office of
Finance and Services  NSWCATOD 92
Merits review; home building; contractor licence application - general building work; requisite level of relevant industry experience in a wide range of building construction work; instrument made under Home Building Act 1989; instrument made under Home Building Regulation 2004. More...
Williamson v Sovik  NSWCATAP 195
APPEAL - Civil and Administrative Tribunal (NSW) –– building dispute –– hearing in absence of party –– whether decision should be set aside –– whether error 'material' –– alleged pre-judgment –– effect of failure to engage in NSW Fair Trading dispute resolution process –– experts reports –– no injustice – appeal dismissed. More...
S & G Homes Pty Ltd t/as Pavilion Homes v Owen
 NSWCATAP 190
PRACTICE AND PROCEDURE – consent orders made by Tribunal in terms of agreed settlement – meaning of s 59(1)(b) of Civil and Administrative Tribunal Act 2013 (NSW) – exercise of discretion to make consent orders –Tribunal must take into account whether it had power to make the consent orders and must make those orders reasonably More...
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.