NSW: A Win For Owners Corporations – Major Defects Given a Wide Meaning

Faiyaaz Shafiq

5 years ago

This article about major defects being given a broader meaning in NSW has been provided by Faiyaaz Shafiq, JS Mueller & Co Lawyers.

The Supreme Court has just handed down its first decision in which it has considered the meaning of “major defects” under the home building legislation. In a win for owners corporations, the Court has said that the definition of “major defects” in the legislation should be given a broad meaning. This case will make it easier for owners corporations to make claims for major defects that are covered by a 6 year warranty period.

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Introduction

In 2015, the NSW Parliament amended the Home Building Act 1989 (HBA) to remove the category of defects known as “structural defects” and introduce the concept of a “major defect”. A major defect is covered by a 6 year warranty period. An owners corporation is able to take legal action against a builder or developer in respect of a major defect within that 6 year warranty period.

What is a Major Defect?

Section 18E(4) of the HBA defines a major defect to mean a defect in a major element of a building that causes, or is likely to cause, either:

the inability to inhabit or use the building (or part of it) for its intended purpose;
the destruction of the building (or part of it); or
a threat of collapse of the building (or part of it). “Major element” is relevantly defined under the HBA to mean:
1. an internal or external load-bearing component of a building that is essential to its stability;
2. a fire safety system; or
3. waterproofing.

The Problem

The problem with the way in which the HBA defines a “major defect” is that, typically, many defects that affect a strata building do not fit neatly within the definition of a “major defect”. For example, a leaking shower or balcony door is certainly a waterproofing defect but often the defect will not cause an inability to inhabit the building for its intended purpose, or destroy the building or create a threat of collapse of the building.

The Case

In the case of Stevenson v Ashton [2019] NSWSC 1689, the New South Wales Supreme Court considered a claim made by a home owner against an owner builder for defects including defective balcony drainage and cladding in a terrace building in Darlinghurst, Sydney. NCAT’s Appeal Panel had concluded that those defects were not major defects because the owner could not prove that those defects had made it impossible to inhabit the building or caused the destruction or threat of collapse of the building (or part of it) as a result of which the owner had run out of time to take legal action against the owner builder for the defects. The owner appealed against NCAT’s decision to the Supreme Court.

The Court’s Reasoning

The Court considered for the first time the proper meaning of the definition of a “major defect” in the HBA. The Court held that the definition cannot be interpreted narrowly but should be interpreted broadly.

The Court said that there is no need for a defect to have already caused an inability to inhabit part of a building or created an imminent risk of destruction or collapse of a building (or part of it) in order to be a major defect.

The Court said the Appeal Panel was wrong to conclude that in order to be a major defect, a defect must be one which had already made it impossible to inhabit part of a building or caused part of the building to be destroyed or put at risk of collapse.

The Court concluded that in order to be a major defect, it only needed to be established that the defect was “likely” to have those consequences which meant there was a reasonable prospect of those consequences occurring (not that those consequences were imminent) and this was not a very demanding test.

The Court also said that evidence from owners to prove the consequences of defects in order to demonstrate that those defects are major defects (such as evidence that part of a building cannot be inhabited) is not absolutely necessary and it may well be that the evidence is better, or even exclusively, the subject of expert opinion.

The Court set aside the Appeal Panel’s decision and sent the case back to NCAT to be determined according to law.

Conclusion

This is the first Supreme Court case that discusses the definition of a “major defect” in the HBA.

The Supreme Court has now confirmed that the definition of a “major defect” is not to be construed narrowly because that is not what Parliament intended. Instead, the definition of a “major defect” should be interpreted widely.

Therefore, many defects which were previously considered by many to be minor can now be considered major which are covered by the 6 year warranty period.

This is a good outcome for owners corporations. It will make it easier for owners corporations to establish that many defects are major defects and give owners corporations more time to start legal action against builders and developers to make a claim for major defects.

This post appears in Strata News #309

Faiyaaz Shafiq JS Mueller & Co Lawyers E: faiyaazshafiq@muellers.com.au P: 02 9562 1266

Disclaimer: The information contained in this article is provided for your personal information only. It is not meant to be legal or professional advice nor should it be used as a substitute for such advice. You should seek legal advice for your specific circumstances before relying on any information herein. Contact JS Mueller & Co for any required legal assistance.

Stevenson v Ashton [2019] NSWSC 1689

In brief: This decision is an appeal from the Appeal Panel of the New South Wales Civil and Administrative Tribunal (NCAT or the Tribunal), concerning the proper construction and application of sections in the Home Building Act 1989 (NSW) (the HB Act) relating to “major defects” and “practical completion” of home building work.

Facts

The appellant, Mr Stevenson, is the current owner (the Owner) of a terrace house in Darlinghurst, formerly owned by the respondent, Ms Ashton (the Builder). When the Builder owned the property, she carried out various additions and alterations pursuant to an owner-builder permit obtained in August 2013. In 2016, soon after the Owner bought the property, he noticed a water leak during a period of heavy rain, and consulted with the Builder.

First instance proceedings in NCAT

On 20 November 2016, the Owner commenced proceedings in NCAT for breaches of the statutory warranties set out in s 18B of the HB Act. The Owner claimed that the building contained defects to the first floor balcony, the roof and gutters, the plumbing, the cladding and the windows in the eastern wall. The Builder denied that the building contained the alleged defects. Further, the builder contended that, because “completion” of the works had occurred in May 2014 for the purposes of ss 3B and 18E of the HB Act, the Tribunal did not have jurisdiction to determine the owner’s claims in respect of defects which were not “major defects” as defined in s 18E(4), as these were time barred beyond 2 years.

Under s 3B(3)(d) of the HB Act, the presumed date of practical completion of owner-builder work (unless an earlier date can be established) is 18 months after the issue of an owner-builder permit. As the permit in this case was issued on 7 August 2013, the presumed date of completion was 6 January 2015 ([102]).

However, at first instance, the Senior Member in NCAT found that the presumption in s 3B(3) did not apply, accepting that the Builder had established an “earlier date for practical completion” in May 2014 ([14], [102]). Accordingly, the Senior Member accepted the Builder’s contention that the Tribunal only had jurisdiction over the Owner’s application with respect to “major defects”.

The Senior Member went on to determine that the first floor balcony and the cladding items were “major defects” within the meaning of s 18E(4), and ordered the Builder to pay the Owner $42,317.11 for the reasonable cost of their rectification ([15]-[16]).

Internal NCAT appeal

Both the Owner and Builder appealed the first instance decision. In her appeal, the Builder challenged the Senior Member’s finding that there were “major defects” in the balcony and cladding, arguing there was “no evidence” to support this determination ([17]). In his “cross-appeal”, the Owner challenged the Senior Member’s finding that the Builder had established an earlier date for practical completion for the purposes of s 3B. Further, the Owner argued that the Senior Member had applied the wrong legal test for determining whether a defect is a “major defect” under s 18E, resulting in an erroneous finding that the roof and plumbing defects were not major defects ([18]).

Date of practical completion

The Appeal Panel dismissed the Owner’s cross-appeal, finding that the Senior Member’s analysis of the evidence about the date of practical completion was correct ([25]).

In its reasons, the Appeal Panel stated that, “for the Owner to have commenced the proceedings within the limitation period for a claim concerning defects other than a ‘major defect’, he would have to prove that […] the residential building work remained incomplete after 20 November 2014” (i.e. within 2 years before the Owner commenced NCAT proceedings). In this regard, the Appeal Panel found, the evidentiary challenge faced by the Owner was “substantial” ([23], [106]).

Meaning of “major defect”

The Appeal Panel allowed the Builder’s appeal, reversing the findings of the Senior Member that the balcony and cladding were major defects ([28]). In coming to this conclusion, the Appeal Panel made the following statements about the test for establishing a “major defect” ([26]):

a major defect “must be part of a ‘major element’ of a building” (such as waterproofing);
the party arguing there is a major defect must prove the extent to which the defect impacts on the habitability or the integrity of the building;
the defect does not need to be shown to make the habitation or use of the building impossible, but “must be such that the habitation or use of the building (or any part of it) cannot be for its intended purpose”;
the consequences of the defect must be “shown to have, or to probably have, a proven consequence” for the habitation or use of the building, or to the integrity of the building;
this requires “proof of something more than inconvenience”;
there must be “evidence as to the actual impact”;
the evidentiary onus “cannot be satisfied by speculation or assumption”;
the possible consequences of the defect must be “at the high end of consequences, or impacts upon a building”;
“there must be evidence of a real possibility of destruction, not merely incidental damage or superficial deterioration”;
these elements need to be proven by evidence of “what the impact has actually been, or what it probably will be”;
evidence from the occupants or users of the building would be necessary to establish these elements of the claim;
expert evidence may assist in establishing that the consequences of the defect are “imminent or probable”, but is not conclusive; and
evidence of the impact upon the inhabitability or use of a building will “rarely be a matter for expert evidence, and more often will be a matter of fact, not opinion”.

Appeal to Supreme Court

On appeal to the Supreme Court, the Owner set out 4 grounds of appeal, only 2 of which Harrison AsJ found it necessary to consider ([117]). The Owner submitted that the Appeal Panel erred in holding ([40]):

that establishing a “major defect” within the meaning of s 18E(4) of the HB Act requires:
1. proven consequence for the habitation or use of a building, or to the integrity of the building;
2. a proven or probable inability to inhabit or to use the building;
3. probative evidence of the actual impact of a defect upon a building, or what it probably will be; and/or
4. evidence of a real possibility of destruction; and
that for the purposes of s 3B(3) of the HB Act, the owner bore the onus of proving that the residential building work on the subject property was not completed before 20 November 2014.

Harrison AsJ allowed the appeal on both grounds, finding that the Appeal Panel took an erroneous approach to the tests for both a “major defect” and “practical completion” under the HB Act.

Establishing a “major defect”

Her Honour first noted that the Appeal Panel’s use of the phrase “must be shown to have, or probably have, a proven consequence” does not adopt the language of “causes, or is likely to cause” used in s 18E(4)(a) of the HB Act. With the proviso that it would be “preferable” for the Appeal Panel to have used the precise language of the section, she accepted the meaning in this instance was “not materially different” ([69]-[71]).

Harrison AsJ went on to make the following comments about the Appeal Panel’s approach to the meaning of “major defect” under s 18E:

The Appeal Panel’s statement that proof of a defect’s consequences requires “evidence as to the actual impact” suggests that the Appeal Panel was “only concerned with defects which had already caused the [relevant] consequences”, omitting the inclusion in s 18E(4)(a) of consequences which a defect is “likely to cause” ([73]);
The conclusion that evidence from homeowners is necessary to establish that a major defect exists “cannot be correct”, as the legislation “does not require such evidence, nor is the likelihood of a major defect causing the consequences in s 18E(4)(a)(i) to (iii) a matter about which a home owner may be capable of giving evidence”. Rather, it may well be that such evidence is “better, or even exclusively, the subject of expert opinion” ([74]);
The Appeal Panel’s statement that the consequences of a major defect must be “imminent or probable” seems to “attach a sense of immediacy to major defects which is not otherwise required” by s 18E(4) ([76]);
Although at times the Appeal Panel did state the complete test in s 18E(4)(a), the “overall effect of its reasons is to seem to require that a major defect is one which is presently manifested and dire” ([76]).
This pattern was reinforced by the Appeal Panel’s approach to assessing the role of expert evidence in establishing the existence of a major defect. In relation to the impact of water proofing defects on the both the balcony and the cladding, the Appeal Panel continued to place “too great an emphasis on the present manifestation of the consequences under s 18E(4)(a)(i) to (iii)” ([87], [92]).

Establishing a date of “practical completion”

In relation to the Owner’s second ground of appeal, Harrison AsJ referred to the principle articulated in Bailey v Owners Corporation of Strata Plan 62666 [2011] NSWCA 293 that, where a party seeks to rely on a limitation period which it must prove by establishing an earlier date, the onus of proof rests with the person making the assertion. In these proceedings, that person was the Builder ([109]).

After reviewing the comments made by the Appeal Panel, read “as a whole and in context”, Harrison AsJ concluded that the “inescapable effect of the Appeal Panel’s plain words” was to reverse that onus of proof from the builder to the plaintiff. This was an error of law ([113]-[114]).

Her Honour rejected the Builder’s submission that, even if the Appeal Panel erred on this point, it made “no material difference to the outcome” because the Appeal Panel separately found that the builder had established the earlier completion date on the evidence. Based on the conflicting evidence put forward by the Owner and Builder, her Honour was “not satisfied” that a different result could not have been produced if that evidence were considered afresh ([115]-[116]).

Accordingly, the Appeal Panel’s decision was set aside, and the matter remitted to NCAT for determination according to law ([120]).

Read the decision: Stevenson v Ashton [2019] NSWSC 1689 on the NSW Caselaw website.

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This article has been republished with permission from the author and first appeared on the JS Mueller & Co Lawyers website.

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