Judgment date: 13 December 2011
Vero Insurance Limited v Kassem [2011] NSWCA 381
The Court of Appeal of New South Wales1
In Brief
- The limitation period under the Home Building Act 1989 (NSW) (HBA), being 7 years from the date of completion of the works, does not necessarily commence when the whole of the works are completed, but may start to run with respect to specific work or portions of work when they have been completed.
- The date of practical completion can be used as a guide as to when work is completed for the purpose of HBA, however it is not definitive.
- Home warranty insurance issued to a developer and in the name of the developer, did not prevent subsequent owners commencing a subrogated claim against the developer.
Background
In June 1999, Ungul Properties Pty Limited (Ungul) entered into a contract with Lusted Pty Limited (Lusted) for the construction of 7 residential units in Blue Bay, New South Wales (Contract).
Vero Insurance Limited (Vero), the applicant in the proceedings, issued home warranty insurance for the development (Policy). The Certificate of Insurance was addressed to Lusted and named Ungul as the only beneficiary.
On 14 December 2000 the strata plan relating to the building was registered.
By 2002 it was apparent there were defects in the building.
In August 2003 various unit holders made claims for the defects under the Policy. However, Vero rejected the claims. The Owners Corporation then commenced proceedings in the Supreme Court against Vero. Vero admitted liability for the defects and paid a total of $808,621.70 to the Owners Corporation in settlement of the claim.
Vero subsequently commenced proceedings against Ungul in the name of the Owners Corporation and the owners of 5 units in the strata plan.
On 6 May 2009, Ozem Azzam Kassem and Andrew Barnden (Kassem), the respondent in these proceedings, were appointed as voluntary administrators of Ungul and the proceedings against Ungul were stayed.
On 21 May 2009, Vero lodged a Proof of Debt with the administrators. The debt was ultimately not accepted by the administrators for various reasons.
These proceedings related to an Application by Vero to terminate a Deed of Company Arrangement (DOCA) between Ungul and its creditors. To determine if the DOCA should be terminated, the Court was required to assess, among other things:
- Whether the claim against Ungul under the HBA was statute barred pursuant to the limitation provisions; and
- Whether Vero was prevented from exercising its right of subrogation against Ungul, as a developer, pursuant to circuity of action.
Home Building Act
Section 18B of the HBA provides various warranties are to be included in every contract for residential building work including:
- The work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications;
- All materials supplied will be good and suitable for the purpose for which they are used;
- The work will be done with due diligence and within the time stipulated in the contract, or within a reasonable time;
- The work will result in a dwelling that is reasonably fit for occupation; and
- Any material used in doing the work will be reasonably fit for the specified purpose.
In the present case, the Contract was between Ungul and Lusted. However, s 18C of the HBA provides for the immediate successor in title to be entitled to the benefit of the statutory warranties. Accordingly, the Owners Corporation and all owners of the units were entitled to enforce the statutory warranties against both Ungul and Lusted.
Section 18E of the HBA provides that proceedings for a breach of statutory warranty must be commenced within 7 years of completion of works to which it relates. Kassem contended the claims were statute barred by virtue of this section.
The proceedings were commenced on 8 October 2007, and Kassem asserted that the works were completed after 8 October 2000.
Practical completion of the project was not achieved until 14 December 2000. However, it was submitted that the relevant limitation period should commence when the waterproofing and drainage work was complete. The defects were nearly all the result of water penetration caused by defective waterproofing and drainage.
Vero submitted that the Court had no basis other than the Certificate of Practical Completion for fixing a start to the running time of the limitation period, and if this date was used, the claim was not statute barred.
The Court considered the decision of Owners Corporation Strata Plan 64757 v MJA Group Pty Limited 2, and held that the limitation period concerning any particular item of damage would commence to run when the work to which the damage related was complete.
The Court ultimately accepted there may be room for debate about whether the claim for breach of statutory warranty was statute barred. However, noted that neither the evidence nor the submissions enabled the Court to have any feel for the likelihood of that defence being ultimately made out.
Ultimately, it was held, for other reasons, that there was no sufficient basis to terminate the DOCA and the Court did not have to decide the point.
Circuity of Action
Ungul argued it was an insured under the Policy because the Insurance Certificate expressly identified it as a beneficiary and stated that the cover would be provided to the beneficiary "and successors in title to the beneficiary".
The various owners who commenced the proceedings were successors in title of Ungul and were thus also insureds under the home warranty policy.
Kassem argued that Vero could not exercise its right of subrogation against the developer as it was a co-insured under the Policy and this would result in circuity of action.
Petrofina (UK) Limited v Magnaload Limited3 provides authority that if an insurer has indemnified and insured A, the insurer has no right of subrogation entitling it to bring an action against B in the name of A, if A and B are co-insureds under the same policy issued by the insurer.
Clause 42 of the Home Building Regulation 1997 (NSW) (the Regulation) required an insurance contract covering the HBA warranties to provide that the beneficiaries under the contract include a person on whose behalf residential building work was done or is to be done, and a successor in title to any such work. However, cl 42(2) of the Regulation provided that among the persons who were not required to be beneficiaries under an insurance contract is "a developer who does residential building work".
As permitted under the Regulation, the Policy provided that:
The Court followed the decision of The Owners of Strata Plan 56587 v TMG Developments Pty Limited 4, in which Einstein J held that a similar exclusion clause had the effect that when an insurer sued a developer under subrogated rights of an Owners Corporation for breach of the statutory warranties, the situation was not one in which the insurer was claiming to be subrogated to the rights of one insured against a co-insured.
The Court applied the exclusion and found that Ungul was not an insured under the Policy. Thus, it was open to Vero to be subrogated to whatever rights the Owners Corporation and the purchasers of the units had against the developer for breach of the statutory warranties.
This produced the odd result that at the time the insurance was issued it identified Ungul as a beneficiary, but in fact the liability of Vero to Ungul was excluded. That oddity was explained by Ungul being at the time the owner of the entire building, and the only entity to whom the policy could be issued.
The Court found that the legislative purpose requiring the insurance to be in place was not to provide cover to a developer. Indeed, the legislation specifically permitted an insurer to exclude liability to a developer. The legislative purpose was instead to ensure that the insurance was in place for the eventual purchasers of
the units in the building.
Implications
In claims for HBA warranties, the relevant limitation period will commence from the completion of the relevant works rather than practical completion of the entire project . This reduces the time in which someone with the benefit of a warranty must identify the defects and commence legal proceedings.
Of course, the Home Building Amendment Act 2011 has further amended the limitation period from 7 years for all work, down to:
- 6 years for structural defects; or
- 2 years for non-structural defects; or
- if the defect was discovered in the last 6 months of a relevant period, the relevant period is extended by a further 6 months.5
The decision also confirms that a home warranty insurer is entitled to bring a subrogated recovery against a developer even if the developer was originally a beneficiary under the policy.
Footnotes
