Australia: High rise in WA: Higher risk for builders (Part 1)

Last Updated: 14 December 2015
Article by Murray Thornhill

News about higher-density living in WA tends to focus on changes to consumers' expectations and investment opportunities. We also hear often about developers locking horns with conservative councils and Development Assessment Panels and the need for more efficient approvals processes.

But what about builders? They face particular legal and commercial risks that traditional home builders don't. Our aim is to raise awareness amongst builders as to the nature and extent of those risks and how to minimise them.

Some of these risks arise because, usually, the consumer/investor and the builder each has a contract with the developer but they do not have a contract with each other. Despite this, there are certain legal duties owed by builders to consumers/investors which mean that builders are often literally exposed to greater risk than they bargained for.

The risks are often most clearly seen when a multi-storey developer becomes insolvent. In that case, the consumer/buyer of the apartment will often look to the builder to deliver on the developer's contractual obligations or to compensate them for the developer's failure to do so.

There are two legal "bridges" connecting buyers to builders in the case of developers' insolvency:

  1. Builders' duty of care at common law to carry out works to a proper and workmanlike standard, a duty which is owed to the consumer/buyer of the built product, and can in some circumstances extend to subsequent buyers; and
  2. A similar duty of care that builders owe under statute.

Of course common law and statutory duties of care apply universally to all builders. However, it is consumer expectations that give rise to specific risks which are peculiar to high-density residential building contractors. At times, construction contractors affected by the slow-down in the resources sector diversify into the high rise mixed use or residential construction sector unaware of these risks.

Whereas the owner's main – often only – concerns in the mining, manufacturing, industrial and commercial sectors are productive capacity and efficiency of output, expectations are substantially more subtle and varied in the residential space. Sadly, we have too often seen contractors of long-standing and good repute become insolvent in part because of difficulties managing these risks.

Depending on factors as varied as location, price, degree and method of promotion/advertising, demographics and the use of buzz-words such as "luxury", "high end" etc. (to name but a few), an apartment owner may be more concerned about the finish or quality of a kitchen benchtop, the functionality of internal spaces and how resistant to sound, heat and cold the walls and ceilings are.

Putting a contractor who is used to dealing with commercial principals in this often alien environment seems risky enough, but the risks don't end there. Consider these facts:

  1. A residential builder's liability for latent (hidden) defects to successive owners who never engaged that builder's services may persist well beyond the statutory six years from the date of practical completion. This has been the settled legal position at least since the High Court's decision 20 years ago in Bryan v Maloney [1995] 182 CLR 609. The High Court has had several opportunities since, to overrule this decision but instead, has persistently reaffirmed it, most recently in the 2014 decision of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36. The impact of these cases is somewhat ameliorated in some States by legislation that sets a long-stop limitation period from the date of practical completion for latent defect claims. Not so, however, in Western Australia.
  2. One characteristic of apartment owners is that there are lots of them, living next door to each other in the same building. In this environment, it often only takes one owner to complain about something which might seem relatively minor – and builders can find themselves dealing with multiple claims and complaints from literally dozens of owners all at once (not to mention the social media fall out that can ensue).
  3. Building apartment blocks strictly in accordance with contractual plans and specifications as between builder and developer will not guarantee a builder immunity from legal action by disgruntled owners. This is because many, less experienced developers will overlook the need to ensure a proper, back-to-back connection between their contract with buyers on the one hand, and with the builder on the other. Again, in these cases, legal theory often departs from commercial reality. The theory is that a builder will not be held liable for owners' disappointed expectations where those expectations arose only out of the contract between the developer as seller and the owner as buyer. Despite the theory, though, experience shows us that:
    1. When a developer becomes insolvent, disgruntled apartments buyers – especially at the "luxury" end - often turn against the builder as the next best object of their frustrations, which can lead to years of expensive court or tribunal proceedings; and
    2. Ironically, it is usually those developers who may not recognise the importance of matching owners' expectations with builders' obligations, that struggle to stay solvent.

In our next article on this topic, we will examine ways of managing these particular risks.

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.

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Murray Thornhill
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