Breach of contract in name, but not in limitation period
Two years is a short time in the life of a building and anecdotally, the sweet spot for the manifestation of defects is the two to three-year mark from completion. Two years from completion is, of course, the period within which a claim for a breach of statutory warranty may be brought under the Home Building Act 1989 (Act) and it would surprise few that many owners would struggle to meet this deadline, whether by virtue of their awareness of the defects, or their awareness of their rights.
If the defects can't meet the criteria for a major defect, attracting a longer statutory warranty period of six years, this leaves owners searching for an alternative cause of action.
One has recently been presented by virtue of the statutory duty introduced by the Design and Building Practitioners Act 2020, but what about breach of contract? With many contracts expressly including the statutory warranties, why would it not be feasible to sue for breach of contractual warranty and obtain the benefit of the six-year limitation period under the Limitation Act 1969?
The Supreme Court has now answered that very question and has done so in the negative.
The owners entered into a residential building contract dated January 2016 with the builder. The builder left the property in April 2017, with the work incomplete.
In August 2019, the owners commenced proceedings in the NSW Civil and Administrative Tribunal against the builder. Those proceedings were transferred to the Local Court in July 2020.
In the Local Court, the owners claimed damages for breach of contract, claiming that the builder had breached express warranties in the contract. Those express warranties mirrored the statutory warranty found under section 18B of the Act and were required to be included in the contract in accordance with section 7(2)(f) of the Act.
The builder relied on a defence that the proceedings had been filed beyond the two-year statutory warranty period for defects other than major defects.
The owners argued that their claim was for a breach contract, where the relevant terms were worded similarly to the warranties in section 18B, rather than importing the statutory warranties and the other provisions in Part 2C of the Act. On the owners' construction, their claim for breach of the contractual warranties had a limitation period of six years, as provided by section 14(1)(a) of the Limitation Act 1969 (Limitation Act).
The Local Court found in favour of the owners and the builder was ordered to pay damages and costs. The Court's reasoning was as follows:
- the builder agreed to make warranties to replicate the statutory warranties in section 18B of the Act
- as the builder did not include in the contract the limitation in section 18E of the Act, his warranties were not so limited
- a claim for breach of statutory warranty is not a claim for breach of contract
- as the warranties were expressed in the contract, the owners' claim was a claim for breach of contract (or, breach of a contractual warranty) and not a claim for breach of statutory warranty.
The builder appealed the decision to the Supreme Court of NSW.
The builder brought the appeal on several grounds, which relevantly included that the Court below erred in construing clause 39 of the contract, which incorporated the statutory warranties which applied pursuant to section 18B of the Act, by concluding that the statutory limitation period of two years to bring claims for defects other than major defects did not apply, but rather, the limitation under section 14(1)(a) of the Limitation Act 1969 (NSW) of six years from the date of breach of contract applied.
The Supreme Court considered that it was clear that the statutory warranties were not meant to be subject to any limitation period other than that which appears in section 18E of the Act. It emphasised that the warranties clause in the relevant contract contained the following qualifying statement: "To the extent required by the Home Building Act, the builder warrants that:", which supported the submission that the limitation period of two years for defects other than major defects, as set out in the Act, would apply, and not the limitation for an action of breach of contract, being six years from the date of the breach.
The Supreme Court found that, if the Court below's construction of the clause was preferred, it would mean that a builder who complied with the requirement of section 7(2)(f) of the Act by expressly including the warranties implied by section 18B into the contract, would be in a worse position than a builder who was party to a contract that did not contain warranties in its written form. Accordingly, a builder who had not expressly included the warranties would be entitled to rely on section 18E of the Act, but one who had would not be.
Ultimately, the contract should be read in light of the Act, whereby expressly including the warranties, as is required by the Act, should not be taken to lengthen their application from the baseline of the Act.
The Supreme Court also found that there was no sensible distinction, in these circumstances, between an action for "breach of statutory warranty" and an action for "breach of contract" to make the Court below's construction compelling. Whilst it may be accurate to describe Part 2C of the Act as "consumer protection legislation", ultimately the limitation periods exist to provide a level of certainty, not only to owners, but also to builders. This is reflected in section 18G of the Act, which seeks to protect the rights of a "person" under the Act, which reference was found not to be specific to the owner, but may also include the builder.
The way ahead
It is not yet known if the matter is to be subject of an appeal.
The Supreme Court has made it clear that the statutory warranties remain unmodified in their operation (or their limitation) by virtue of express inclusion in a contract. Put another way, a breach of a warranty which is included in a contract, that is required to be included in the contract and mirrors the warranties included in section 18B of the Act, must be read with the Act. A breach of those warranties will not give rise to a breach exclusively in the contract. That breach will be considered in light of the Act and the other applicable provisions in Part 2C of the Act.
The door may have been left open for owners to negotiate warranties which are separate, bespoke and distinct from the statutory warranties, which may attract the six-year limitation period for a breach of contract, regardless of the nature of the defect. Clear and unequivocal drafting would be required, to demonstrate that the parties intended for the additional warranties to apply in addition to and over and above those in the Act.
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.