Australia: Latent defects: QLD Court of Appeal rules on limitation of time to commence proceedings

In the recent decision of Melisavon Pty Ltd v Springfield Land Development Corporation Pty Ltd [2014] QCA 233, the Queensland Court of Appeal held that when there is physical damage from a latent building defect, the limitation period for bringing a claim for economic loss arising from the defect will not necessarily commence on the appearance of the damage, but rather, when the damage can be traced to its source by the application of reasonable diligence.

This is relevant considering the Limitation of Actions Act 1974 (Act) provides that negligence proceedings cannot be commenced after the expiration of six years from the date on which the cause of action arose.

This means that where damage from a latent building defect is identified in 2007 but the damage is only found to be caused by a faulty design in 2010, a claim for damages will not be statute barred by the Act if proceedings are commenced in 2015.

Background

In January 2000, a design contract was entered into between Springfield Land Development Corporation (Springfield) and Melisavon Pty Ltd (formerly Karamisheff Nagel Pty Ltd) for the design of a clubhouse and its surrounds on land being developed into a residential golf course community.

Melisavon commissioned and subsequently received a geotechnical report which provided that the soil beneath the proposed building area for the clubhouse was susceptible to ground heave due to varying moisture conditions. The movement of soil in the area was so high (between 15mm and 120mm) that it was necessary for the design to provide sufficient separation between the slab and the underlying ground so that the inevitable movements would not impact upon the slab.

Both parties were aware of the soil conditions and potential for ground heave.

The design of the clubhouse was completed in mid-2003 and construction commenced shortly thereafter.

At a site inspection in November 2003, a crack on the ground floor slab was identified. At the time, it was believed that the crack was caused by greater than anticipated ground heave but was otherwise stable. It was agreed that the crack could simply be disguised by the application of a concrete seal after the wet season finished.

A certificate of practical completion was issued on 19 December 2003. The list of preliminary defects to the builder referred to the cracking and to the fact that the sealing of the crack was to be reviewed.

Further extensive cracking and uplifting was identified at a site inspection in June 2004. The cause of the ground heave was believed to be due to the extensive irrigation of the gardens surrounding the clubhouse since the ground in those areas was saturated.

In December 2004, a defect liability period expiration inspection notice was issued to the builder which detailed cracks that were to be buffed and resealed. In March 2005, the builder advised that the majority of the defects included in the notice had been rectified, the remaining being items which it did not consider to be caused by defective workmanship or materials.

The builder later advised in June 2005 that it did not accept any responsibilities relating to the ground heave which, its aid, was a design and maintenance issue. Springfield subsequently undertook a remedial investigation which continued until October 2005.

Springfield commenced proceedings against Melisavon by a claim filed on 16 June 2011 for $866,258. In its amended defence, Melisavon pleaded that the damage first occurred in either late 2003 or early 2004 and, for this reason, the claim was statute barred as more than six years had passed since the cause of action arose.

In its reply, Springfield contended that it did not discover the defects until 2009 and 2010 when, only at that time, did it become aware that the damage was caused by the defective design of the clubhouse and its surrounds.

Application for Summary Judgment

Melisavon applied for summary judgment on the basis that Springfield's claim was statute barred by the Act since the cause of action arose prior to 16 June 2005, the date six years before the commencement of Springfield's proceedings.

The Supreme Court held that the determination of the time when the cause of action against Melisavon arose was not as cut and dried as being when the cracking first appeared ¹. In particular, the Court referred to the decision of Pullen v Gutteridge Haskins & Davey Pty Ltd [1993] 1 VR 27 in which the Victorian Court of Appeal found that in cases of pure economic loss due to a latent defect in design, time begins to run when the latent defect first becomes known or manifest.

The Court also referred to Cyril Smith & Associates Pty Ltd v The Owners – Strata Plan No 64970 [2011] NSWCA 181, in which the New South Wales Court of Appeal observed:

[Pullen] is authority for the proposition that even where actual damage caused by the latent defect in the building has been suffered more than six years before the commencement of the litigation, the cause of action does not accrue until the link between the physical manifestation and the underlying defect is known or ought to be known. Such a principle would constitute an exception to the rule that a cause of action in negligence accrues when material damage is first suffered.

Accordingly, the Court found that there was need for a factual investigation as to when Springfield first became aware (or ought to have become aware) that it had suffered loss because of the alleged defective design ². This sort of factual determination was not one which the Court found was amenable to determination on a summary judgment application.

The application was subsequently dismissed on the basis that the facts of the case were not such that Springfield had no real prospect of succeeding on all or part of its claim, which the Court must have been satisfied of if it were to give summary judgement for Melisavon.

Appeal

The decision to dismiss the application was appealed and the appeal was dismissed with the President of the Court of Appeal (with whose orders A Lyons J agreed) confirming the approach of the Supreme Court ³. In particular, her Honour held that:

[T]he relevant cases show that for the purposes of s10 (1)(a) Limitations Act, the respondent's cause of action, which is at least arguably solely for economic loss, arose when it suffered economic loss, that is, when the latent defect, the alleged negligently engineered design of the clubhouse, first became known or manifest in the sense of being discoverable by reasonable diligence.

This was found to be the case since it was only at this time that Springfield would have suffered an actual diminution in the market value of the clubhouse ⁴.

How does the decision affect you?

The decision means that the time in which proceedings may be commenced for material damage to building works may not start to run until the link between the physical manifestation of the damage and the underlying defect responsible for the damage is known (or ought to be known).

Establishing this link is often difficult and can be the subject of extensive expert investigations, which may or may not be fruitful.

As such, despite the findings in this case, we would still recommend a party exercise caution in working out the expiration of the limitation period in which a party may bring its claim and always keep a detailed record of when physical damage to building works becomes visible for this purpose.

Footnotes

¹Springfield Land Development Corporation v Melisavon Pty Ltd [2013] QSC 228, [62].

²Ibid.

³Holmes JA gave a dissenting judgment.

⁴Melisavon Pty Ltd v Springfield Land Development Corporation Pty Ltd [2014] QCA, [43].

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.