Introduction
In Vero Insurance Ltd v Kassem [2011] NSWCA 381, the NSW Court of Appeal recently held that where a breach of statutory warranty is established under the Home Building Act 1989 (NSW) ("the HBA"), the limitation period does not necessarily commence on the date of practical completion, but may commence on the earlier date of completion of the specific works or part of the works to which the dispute relates.
As the limitation periods provided for under the HBA were legislatively reduced in 2011 to six years for structural defects and two years for non-structural defects, home owners seeking to claim under home warranty policies of insurance need to act quickly to avoid the expiration of the relevant limitation period, bearing in mind that time may have begun to run before the date of practical completion of the residential building works.
The Court of Appeal also examined a home owners warranty insurer's right to subrogated recovery against the developer.
Background
Ungul Properties Pty Ltd ("the Developer") contracted with Lusted Pty Ltd ("the Builder") for the development of seven residential units in NSW in June 1999. As the construction work was 'residential building work' within the meaning of the HBA, certain statutory warranties were implied as part of the contract for works.
In accordance with the HBA, it is compulsory for insurance covering any potential breach of the implied statutory warranties to be obtained by the Builder. Relevantly, clause 42 of the Home Building Regulation 1997 requires the beneficiary of the insurance contract to be the person on whose behalf the work was being done, along with any successor in title to that person. The developer is not required to be a beneficiary.
On 24 June 1999, Vero Insurance Pty Ltd ("Vero") issued seven certificates of insurance in relation to the residential units. The insurance was addressed to the Builder, however, the Developer was named as the sole beneficiary of the insurance.
The building's strata plan was registered on 14 December 2000. Throughout 2001, five of the seven units were sold. The Developer retained two of the units. Defects in the building became apparent in 2002 and by mid 2003, a number of the unit-holders had made claims on the insurance issued by Vero. Vero rejected the claims.
Following the commencement of litigation by the Owners Corporation against the Builder and Vero, the Builder went into liquidation. In June 2007, Vero admitted liability for the defects and settled the dispute with the Owners Corporation.
Vero then commenced an action against the Developer in the name of the Owners Corporation and the owners of the five units for recovery of the settlement sum. Vero asserted that the litigation was brought in exercise of its right of subrogation under the policies.
Voluntary administrators ("Kassem") were appointed over the Developer's affairs on 6 May 2009 and the proceedings against the Developer were stayed in accordance with section 440D of the Corporations Act 2001 ("the Corporations Act"). Vero lodged a Proof of Debt with Kassem on 21 May 2009. However, it was not accepted by Kassem.
Vero applied to the Supreme Court to terminate the Deed of Company Arrangement ("DOCA") between the Developer and its creditors. In order to consider the application, it was necessary for the Court to assess whether the claim against the Developer was statute barred by virtue of the limitation provisions of the HBA and, further, whether Vero was prevented from exercising subrogated rights against the Developer due to 'circuity of action'.
At first instance, the trial judge held that, although Vero's claim against the Developer arose by way of subrogation, Vero had an unliquidated claim against the Developer sufficient to define Vero as a 'creditor' of the Developer within the meaning of the Corporations Act. This was not challenged on appeal. Further, it was held that Vero had not established sufficient grounds for the DOCA to be terminated.
The grounds of appeal to the New South Wales Court of Appeal were twofold. It was submitted on behalf Vero that the Court erred by neglecting to address Vero's application to terminate the DOCA on the basis that Vero was a substantial creditor, as opposed to Vero being a creditor for a nominal amount. Further, Vero submitted that the trial judge had given inadequate reasons for the finding that Vero had failed to establish sufficient grounds for terminating the DOCA.
The Limitation Argument
Section 18E of the HBA statute barred any proceedings for breach of statutory warranty from the date seven years after "the completion of the work to which it relates".1 The Developer argued that the claims were statute barred as the works were completed prior to 8 October 2000, whereas the proceedings were not commenced until 8 October 2007 (one day late).
The Court of Appeal concluded that "the limitation period concerning any particular item of damage would commence to run when the work to which the damage relates was completed". This was not necessarily the date of practical completion. The Court of Appeal accepted that the date of completion may therefore be the date that specific work by a particular contractor or subcontractor was completed.
The Court of Appeal noted that there was likely to be room for debate on the issue of whether the claims were statute barred. However, it was unnecessary for the Court to consider the factual circumstances as there was no indication that such defences would ultimately be made out. Further, given that (for other reasons) the Court found that there was no basis to terminate the DOCA, it was unnecessary to decide the limitation point.
The Circuity Argument
The Developer argued that, as it was listed as a beneficiary under the home warranty insurance policy (which extended cover to any successors in title), and the owners of the units were successors to the Developer's title, Vero could not exercise its right of subrogation against the Developer as it was a co-insured under the Policy. The Developer asserted that any subrogated action brought by Vero would be "bound to be dismissed so as to avoid circuity of action."
The rule against circuity of action is designed to prevent an insurer from bringing a subrogated action against a third party, if that third party is a co-insured under the insurance policy.
Although the Vero policy listed the Developer as a beneficiary, it also specifically excluded coverage to the Developer, stating: "we have no liability to you whatsoever if you are a developer (as defined in the Act) in relation to the work". While this resulted in an "oddity", the purpose of the legislation was to ensure that there was insurance in place when the units were eventually purchased. As the units had not been purchased when the insurance was issued, the Developer was the only entity to which the insurance could be issued.
As such, the Court of Appeal found that the Developer was not an insured under Vero's policy and Vero was entitled to exercise its rights of subrogation against it.
Conclusion/Implications
The limitation period under the HBA for claims for breach of statutory warranty may begin to run in relation to different parts of the same residential building works at different times.
Consequently, a beneficiary of a home warranty insurance policy covering breach of statutory warranty may have less than seven years after practical completion to identify defects arising out of such breaches, before the limitation period expires. As the Court of Appeal did not fully canvass all of the potential issues arising out of this decision, it is likely that this issue will become the subject of future litigation.
The decision also confirms that an insurer will be at liberty to bring a subrogated action against a developer in the name of an owners corporation for breach of statutory warranties, even if the individual members of the owners corporation have the benefit of cover under the relevant policy.
1The Home Building Amendment Act 2011 has further the limitation period from seven years for all work, as follows :
- six years for structural defects; or
- two 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 six months
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