Design defects – builders and developers may be liable

As a builder or developer, it can be tempting to assume that responsibility for the design of any building you’re constructing or developing rests solely with its designer.

But that assumption could come back to haunt you.

A recent Court of Appeal decision sends a clear message that if you build it or develop it, you may also be responsible for any defects in the design of the building.

In 2000 Meridian, a company controlled by a Mrs King and her son, engaged Beach Construction to convert a warehouse into a mixed residential and commercial strata scheme.

Unfortunately, the plans and specifications drawn up by the Kings’ architect contained defects in design, including the absence of handrails and thermal detectors. They also failed to conform with the requirements of the Building Code of Australia, the Environmental Planning and Assessment Act 1979 (NSW) and the conditions of the relevant development consent.

Using those faulty plans and specifications, Beach Construction completed the work.

In 2007, following the registration of the strata scheme and sale of the units , the Owners Corporation sued the Kings, Meridian and Beach Construction. It claimed that the design defects breached the statutory warranties set out in section 18B of the Home Building Act 1989 (NSW) (Act) which are implied in all NSW residential building contracts.

The Owners Corporation alleged that it was entitled to the benefit of the section 18B statutory warranties by virtue of section 18C of the Act. Section 18C provides that a subsequent owner is entitled to the benefit of the statutory warranties as though that owner had entered into the building contract with the builder or developer.

Section 18B of the Act included warranties that:

• the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications in the contract; and

• the work will comply with any law.

Primary Decision

The primary judge dismissed the Owners Corporation claim on the grounds that the Kings were not developers under section 3A of the Act because they were not parties to the building contract with Beach Construction.

The judge also found that even if the Kings were developers within the meaning of the Act, they could not be liable if the builder wasn’t liable, and that the builder could not be liable for the design defects since it had complied with the plans and specifications.

Appeal

By the time the Owners Corporation appealed the decision both Meridian and Beach Construction had gone into liquidation, leaving only the Kings as possible respondents.

The Court of Appeal held that the Kings were developers within the meaning of the Act because:

• the building contract named the Kings and Meridian as principals; and

• minutes of meetings held at the site indicated that the building contract had been signed by the Kings.

The Kings submitted that even if they were considered developers, they could still only be held liable for defects for which the builder was liable, and the builder could not be liable for defects in the designs and specifications.

The Court of Appeal disagreed, holding that if the warranty that the work will comply with the law has been breached, that is sufficient for both the developer and builder to be liable for the design errors.

The Kings argued that the implied warranty that the work will be carried out in accordance with the plans and specifications prevails over the warranty that the work will comply with the law.  The Court also rejected this argument, stating that the two statutory warranties are to be read together. That is, the builder warrants that the construction of the work in accordance with the plans and specifications will comply with the law.

The Court of Appeal found:

• where a builder is engaged under a “construct only” contract to do work; and

• that builder follows the plans and specifications provided by the developer; and

• there is an error in the design in those plans and specifications; then

• both the developer and builder will be liable for that error.

Judgment was entered in favour of the Owners Corporation against the Kings for about $5M with costs.

Implications for builders and developers

These proceedings took place before the insertion of section 18F(1)(b) in the Act which now states that in proceedings for a breach of statutory warranty, it is a defence to prove that the deficiencies are from:

• instructions given by the person for whom the work was contracted to be done contrary to the advice of the defendant or person who did the work, being advice given in writing before the work was done, or

• reasonable reliance by the defendant on instructions given by a person who is a relevant professional acting for the person for whom the work was contracted to be done and who is independent of the defendant, being instructions given in writing before the work was done or confirmed in writing after the work was done.

Regardless, the King decision sends a clear message to developers and builders that each statutory warranty will be enforced independently by the courts, and it is not enough to simply argue reliance on plans and specifications prepared by others.

If you are a builder or developer and suspect that the plans and specifications provided to you would result in defective construction or are inconsistent with development conditions or building standards, consider seeking independent legal and expert advice.

Author: Kate Cormican 

Contributing author: David Creais