In brief - Building companies should consider a risk assessment of past projects
While an effectuated DOCA extinguishes all claims that existed at the time when a company was placed into administration, the law is not yet settled on whether this is also the case for latent defects claims which were not known at the time. To mitigate risk, building companies considering a DOCA should review all past projects.
DOCAs extinguish all known claims when company is placed into administration
In the building industry, it is common for defects to remain unknown for an extended period of time. During the intervening period the building company may have appointed an administrator, proceeded to a DOCA and effectuated the DOCA. One of the outcomes of an effectuated DOCA is that all claims that existed at the time when the company was placed into administration are extinguished. The question is whether a claim relating to a latent defect, which was not known to exist at the time that the company was placed into administration, is also extinguished by the operation of the DOCA.
Section 553(1) of the Corporations Act includes future and contingent claims, among others
Under section 444A(4)(i), a DOCA must indicate what date on or before which claims must have arisen. Usually this date will be the date of appointment of the administrator. The courts have held that the use of the term "creditors" in Pt 5.3A is similar to its use in those parts of the Act that relate to winding up. (See Brash Holdings Ltd v Katile Pty Ltd  1 VR 24 at ) Therefore, the term "creditors" in section 444D(1) should be construed in accordance with section 553 of the Act.
Section 553(1) provides:
Therefore, it is clear that a DOCA will not only bind creditors with a debt that was due and payable at the time that the company was placed in administration, but also persons with a claim which is "future, certain or contingent, ascertained or sounding only in damages".
Defining whether a claim is contingent or prospective
It is then necessary to consider whether a latent defect claim falls within the definition of a contingent or prospective claim so as to be extinguished by the operation of the DOCA.
In Edwards & Ors v Attorney-General & Anor  NSWCA 272 at  to  the NSW Court of Appeal considered the difference between actual and/or contingent claim and a "mere expectancy". According to the Court:
However, the Full Federal Court in Lam Soon Australia Pty Ltd v Molit (No. 55) Pty Ltd  70 FCR 34 [at 43-44] noted, by way of obiter, that a right to sue for damages for a future breach of covenant is not a contingent claim until the breach occurs. Prior to the breach occurring, the Court considered any entitlement to be a mere expectancy which could not be classified as an admissible claim.
In Lam Soon, the right of the creditor was that of a landlord's claim for future rent.
Professor Donovan in Company Receivers & Administrators (Lawbook Co, Sydney, 2001) at [17.2810]) asserts that warranty holders should not be considered contingent creditors because a DOCA "is not intended to wipe the company's slate clean for all time and to deal with speculative claims. It is not intended to exorcise all the company's ghosts".
In Community Development Pty Ltd v Engwirda Construction Company  HCA 47, the High Court considered whether a building company was a contingent creditor of a developer. The parties had entered into a contract for the construction of a block of home units. A dispute arose as to whether the building company had discharged its contractual obligations so as to become entitled to a final certificate. Under the contract, the building company had no moneys owing to it unless and until it could discharge those contractual obligations. The High Court held that the developer was:
Therefore, the High Court concluded that the building company was indeed a contingent creditor of the developer.
Latent defect claims are usually brought under statute, in contract or in tort
Most latent defect claims are brought:
- under statute, for example the Home Building Act 1989 (NSW) or other relevant state based legislation which implies warranties into relevant contracts
- in contract (generally for breach of contractual warranties), or
- in tort for breach of a relevant duty of care, generally to undertake the work in a proper and workmanlike manner or the like
In re Motor Group Australia Pty Ltd  FCA 985, the Court considered whether a group of persons who purchased a new motor vehicle from the company and had a motor vehicle warranty but had not made a warranty claim were contingent or prospective creditors caught by the DOCA. Hely J regarded such persons as being contingent or prospective creditors as at the date of the voluntary administration because warranties had been issued prior to the company being placed in administration, notwithstanding that the liability on the warranty was dependent on the occurrence of later events.
In BE Australia WD Pty Ltd (subject to a deed of company arrangement) v Sutton  NSWCA 414, the NSW Court of Appeal considered whether an undetermined court application constituted a "claim". The facts in that matter were that Ms Sutton had performed work as a consultant for BE Australia but had no direct contractual relationship with BE Australia. Her services were provided through labour hire companies. Prior to BE Australia being placed into administration, Ms Sutton's services were terminated without prior notice or payment in lieu of notice. Ms Sutton filed a claim with the Industrial Relations Commission alleging that the "arrangements" with BE Australia had been unfair and should be varied to provide that her services could not be terminated without reasonable notice. Shortly before the proceedings before the IRC were heard, BE Australia was placed into administration.
NSW Court of Appeal at odds with Full Federal Court over contingency claims
Campbell J of the NSW Court of Appeal analysed the differing views of the Full Federal Court in Lam Soon and the judgment of Hely J in Re Motor Group and said as follows:
It is apparent from Campbell J's analysis that this area of law is not entirely settled and that the view of the NSW Court of Appeal is at odds with that of the Full Federal Court. Accordingly, for a building company considering a DOCA there is a risk that claims that are not yet manifest but which may arise in the future against them (such as latent building defects), may not be extinguished by the DOCA.
However, the NSW Supreme Court is bound to follow the decision in BE Australia, which is consistent with the High Court's approach in Engwirda Constructions and the general "basal fact" test which is often applied to determine whether a claim has arisen, e.g. Larkenden Pty Ltd v Lloyd Energy Systems Pty Ltd  NSWSC 1567 at . The High Court decision will also bind the courts of the other states and territories.
Likely that future latent defect claims bound by DOCA if building owner holds right pursuant to statutory or contractual warranty
Further, at a practical level, the differing approaches of the NSW Supreme Court and the Federal Court may not be relevant to the majority of latent defect claims. That is because most claims are brought on alternate bases (breach of contractual or statutory warranty and alternatively in tort for breach of a duty of care). In the case of a claim alleging a construction defect, the "breach" (of statutory or contractual warranty) which was considered relevant by the Federal Court, occurs at the time of construction.
Accordingly, in most instances the latent defect claim will have been elevated from a mere expectancy to a contingency prior to the administration commencing (providing the claim is based on a breach of warranty). That may not be the case in tort. Whilst the relevant breach has occurred, no cause of action (that is, legal entitlement) accrues until the damage becomes manifest which will potentially be after the administration commences. To that extent, claims in tort may suffer a similar fate to Ms Sutton.
Whilst not without some doubt, the most likely outcome, in either the Supreme Court of any state or the Federal Court, would be a finding that, because the building owner held the right pursuant to the statutory or contractual warranty at the time of appointment, then future claims in respect of latent defects are bound by the DOCA.
Review past projects to assess risk of latent defect claims
Given that the law is not settled in this area and it is not possible to be absolutely certain that a latent defect claim will be extinguished by an effectuated DOCA, it is recommended that any building company considering a DOCA should conduct an assessment of the risk associated with any claim against it for defective work by reviewing each project undertaken in the previous fifteen years and considering whether latent defect claims may still be available, pursuant to statutory or contractual warranties or in tort.
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.