Since most strata buildings don’t have home building insurance [as they’re over 3 storeys] and even where insurance exists it is ‘last resort’, they have to sue the builder [and sometimes others to get defects fixed].  So, it’s time we all brushed up on the basics and not so basics of suing for strata building defects.

Introduction

Sadly, these days if a strata building can’t get all its building defects fixed by the builder [or someone else] it has to sue them to either get damages or send them into insolvency to trigger any home building insurance [last resort] claim rights.

Plus, strata buildings have not had an easy time running those cases as the large amounts involved mean they run in superior courts, builders have strenuously defended these actions, and the High Court has unhelpfully narrowed the law in this area.  So the cases are taking longer, are more expensive, and are harder to win.

It’s not very satisfactory but there’s no point whining about it.

We need to go back to basics about such claims to better understand how to run them properly and, then win them.

So, this article is a generalised 2021 refresher on non-insurance claim legal actions for strata building defects.

It’s also timely for New South Wales strata buildings since, in July 2021, new laws surrounding building defects will begin which add to and change some of these things which I’ll be covering in another article later this month.

What classifies as a defect?

You’d think this is obvious.  But often it’s poorly defined by strata buildings and their advisors which can lead to problems with their claims and cases later down the track.  So, it’s important to understand and critically assess this.

In general terms, a building defect is a fault in or failure of a building element that means it does not function as it should or satisfy the legal requirements that apply to it.  For instance, where a waterproof membrane lets water through or where a fire door does not meet the required FRL [fire resistance level].

But, in, legal actions what is and is not a defect varies depending on the legal basis for the claim and is different in contract claims, statutory warranty claims, and negligence claims.

• Under contract law, a defect involves a failure to meet the required standards in the contract.
• Under statutory warranties, a defect involves a failure to comply with Australian Standards, and the other lesser warranties [including failing to meet the required standards in the contract].
• Under negligence, a defect involves a failure to comply with a reasonable standard having regard to the duties owed to the strata building or strata owners in relation to the building.

The differences are subtle but matter when formulating, proving, and running the different kinds of legal actions.

Contract claims

Strata buildings are not parties to the contract between the developer and builder under which they are built since they don’t exist at the time of contracting and only come into existence after completion.  And, since there’s no privity of contract [a legal term for access to or sharing of rights] between them and the developer, strata buildings can’t sue builders or others directly under the contract.

There is some academic writing and a few arcane English cases which identify and suggest legal principles that could permit actions by later building owners [like strata buildings] under a construction contract.  For now, they are in the speculative legal action realm and beyond the scope of this article.  But, if you want to discuss this topic, please contact me.

So, whilst the building contract is relevant to other claims [see below] and it’s important to have it, understand its terms, and apply some of them to determine the applicable construction standards and other dates, it’s not the main basis for strata building defect litigation.

That’s a shame as the contracting property owner has a range of rights that would be very useful to strata buildings in the early phase of building completion and handover [especially if that overlaps with the defects liability period under the building contract].

Plus, the losses that can be claimed for a breach of contract are more extensive, covering a wider range of losses than just the cost of rectifying the building defects.

Interestingly, however, Tasmania has legislated to give strata buildings the developer’s contractual rights under subrogation [a legal term for re-allocation] in relation to defective building work [see section 85 of the Strata Titles Act 1998].

Statutory warranty claims

Under home building laws in each state whenever residential construction work is undertaken warranties [a legal term for binding promises] apply to the work regardless of the contract terms that ensure at least a basic level of construction quality.

For example, under the Victorian Domestic Building Contracts Act 1995 they are as follows [paraphrased]:

• work should be performed in a proper and workmanlike manner,
• work will be done according to the plans and specifications in the contract,
• all materials will be good and suitable for their purpose,
• work will comply with all laws and legal requirements including, the Building Act 1993 and regulations,
• work will be carried out with reasonable care and skill,
• work will be completed by the date or period specified in the contract,
• where work is done for a home, the home will be suitable for occupation when finished, and
• if the contract specifies a particular purpose, the work and materials will be reasonably fit for that purpose.

https://content.legislation.vic.gov.au/sites/default/files/be99e0fb-e1e7-3113-aa53-8b84f8f61a7a_95-91aa086 authorised.pdf

These warranties are typically the basis for most strata building defects claims: supporting claims that the new strata building is defective because parts of it are not built to applicable standards, the contract and specifications, competently, and/or suitable for residential occupation.

That’s because, regardless of anything in the contract and the lack of privity, these statutory warranties support later owner claims.

This is the kind of legal action used in the well known Lacrosse case in Victoria over the combustible cladding fire and damage in 2017.

Legal actions based on statutory warranties can be taken in specialist Tribunals [VCAT and the other CATs] or civil courts.  And, they can be taken in conjunction with other kinds of claims about the building defects, like negligence claims.

But, the losses that can be claimed for breaches of statutory warranties are generally limited to just the cost of rectifying the building defects.

Negligence claims

Under the common law, duties can arise between people and organisations that have a relationship such that a failure to take reasonable care to avoid causing injury or loss to another person and make them liable for that failure.

This principle has been used to make claims for strata building defects against builders, developers, architects, engineers, certifiers, and others involved in the design and/or construction of the building.

These kinds of claims were emerging a while following the favourable decisions in Walter’s Case [The Owners — Strata Plan No 43551 v Walter Construction Group Ltd] and Woolcock Case [Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16] that opened up negligence cases over defects for later building owners.  But, in 2014 the High Court decided the Brookfield Case [Brookfield Multiplex Ltd v. Owners Corporation Strata Plan 61288 & Anor] which decided that the builder did not owe a duty of care to the serviced apartment strata building.

So, that’s put most strata buildings and their lawyers off taking negligence legal actions for building defects.

But, negligence claims for strata building defects are not dead [in my opinion] and are worth pursuing since they offer claimants the ability to:

• use longer limitation periods before making building defect claims,
• rely on a wider range of duty breaches than just contract and statutory warranty based failures,
• make claims against other organisations associated with the development and construction of the strata building, and
• allow damages claims extending beyond the cost of rectifying the defects.

I’ll be writing a longer article analysing and critiquing the Brookfield case in the near future.

Class actions

It’s also possible to run a class action [a representative legal action for a group or class of claimants] for strata building defects.

A class action could be limited to the strata corporation, strata owners, and strata residents or tenants on a single building, or it could be for strata corporation, strata owners, and strata residents or tenants in many strata buildings where they have the same kind of claim/s.

They offer strata buildings, owners, and residents/tenants the opportunity to group together to better protect their rights and secure compensation since they: are about strength in numbers; decrease the individual burden; and; increase the shared chance of success.

Class actions also allow more and different kinds of damages claims than conventional legal actions for strata building defects.  And, they permit claims for building defects by strata buildings for common property to be combined with claims for building defects by strata owners for lot property and contents.

But, we haven’t seen any strata class actions yet.

Williams Roberts is investigating and organising a class action for strata buildings with combustible cladding [see their webpage for more details] but it has not yet started].

Mitigation

Finally, we need to consider the countervailing obligation on strata buildings with defects to mitigate [a legal term for minimise] their loss.

For strata buildings, mitigation means that strata buildings must act to reasonably limit their losses from building defects.  That means repairing the damage that is easy to fix or stop and/or is likely to worsen over time even if that’s before their claim is finalised.

This is especially problematic for strata buildings since they typically have obligations under strata laws to repair defective common property [where most defects exist] immediately regardless of whether they are original construction defects, regardless of any legal actions that are underway, and, the cost of those works.

So, the duty to mitigate puts additional pressure on strata buildings to quickly and effectively deal with building defects.

Conclusions

As this overview reveals, most strata building defects legal actions these days are statutory warranty-based claims.  But, they are as a result very predictable, give strata building limited claim options and recover very limited damages.

So, they’ve become very easy for builders to delay and defend, strata buildings spend too much running them, and, even when successful, strata buildings end up getting compromised or reduced compensation that doesn’t cover all the cost of rectifying building defects, experts and consultant fees, legal costs and the time, trouble and disturbance they have and will incur and suffer.

So, in my opinion, it’s time to do 3 things with strata building defects claims.

1. Find better [smarter] ways to run standard or lower value strata building defect legal claims to get the same or better results sooner and cheaper.
2. For bigger and more complex strata building defects, to start making more difficult but higher reward kinds of strata building defect legal claims and to win them.
3. To leverage the faster speed, increasing complexity, and higher risk of these new approaches to secure worthwhile settlement outcomes with builders, developers, and construction consultants.

I’ll be writing more about these things and better strategies in the coming weeks.

Article contributed by Francesco Andreone – GoStrata

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