18 Sep 2014

Extended limitation period for breach of contract claims for defective building work in Victoria

by Jonathan McTigue, Sam Morrissy

Victorian owners now have 10 years from the issue of the occupancy permit in which to bring a claim in contract or tort for defective building work. Contractors and consultants undertaking construction work (or design in relation to that work) should now review their insurance arrangements to ensure their coverage is sufficient.

In cases of defective building work, the usual position has been that claims in contract and tort must be brought within six years of the cause of action arising.

The recent Victorian Court of Appeal decision of Brirek Industries Pty Ltd v McKenzie Group Consulting (Vic) Pty Ltd [2014] VSCA 165 has upset that understanding, holding that section 134 of the Building Act 1993 (Vic) means that an owner has 10 years from the issue of the occupancy permit in which to bring a claim in contract or tort for defective building work

What does the Building Act say?

Section 134 of the Building Act provides:

"… despite anything to the contrary in the Limitation of Actions Act 1958 or any other Act or Law, a building action cannot be brought more than 10 years after the date of the occupancy permit in respect of the building work … or [the date of issue] of the certificate of final inspection."

A building action is defined as "an action (including a counter-claim) for damages for loss or damage arising out of or concerning defective building work". This includes actions for breach of contract and for negligence.

Section 5(1) of the Limitations of Actions Act 1958 (Vic) bars an action in contract or tort from being brought more than six years after the date on which the cause of action accrued. In negligence actions, the cause of action accrues when damage is suffered. In the case of latent defects, this means that the action can accrue long after the building works are completed.

For some time there have been two competing interpretations of section 134 of the Building Act. One interpretation is that it replaces the six year limitation period that would otherwise apply. The alternative interpretation is that section 134 operates as a "long stop" for claims in negligence, acting as an absolute bar to limit the common law where the limitation period would normally commence in negligence only upon manifestation of the defect.

VCAT had historically favoured the first approach. At trial in Brirek Industries v McKenzie Group Consulting [2011] VCC 294, Judge Shelton favoured the "long stop" interpretation.

What happened in the Brirek case?

Brirek was a property development company. It purchased a lot in a subdivision in 2001. A director of the vendor company falsely held himself out as a registered builder. Brirek initially engaged this person to construct a unit on the lot that it had purchased. The defendant McKenzie was engaged as a building surveyor and to issue permits for the development.

Various delays led to Brirek taking over the construction in 2004 and engaging McKenzie directly. Brirek finally completed construction and sold the unit in March 2008. Other units in the development had been sold several years previously.

Brirek alleged that McKenzie committed a number of breaches of the Building Act and, as a result, was in breach of both its contract with Brirek and the duty of care that it owed to Brirek. The key issues for the Victorian Court of Appeal were whether Brirek's claim for breach of contract was barred by section 134 of the Building Act, and whether the trial judge was correct in rejecting Brirek's claim for negligence.

Section 134 of the Building Act – 10 years?

At first instance, Judge Shelton held that the 10 year limitation period in section 134 operates exclusively as a long stop time bar on negligence claims.

Judge Shelton relied on the Second Reading speech to interpret the meaning of section 134. That speech indicated that the Victorian Parliament had intended to end confusion about whether the six year limitation period for construction claims began on the date when damage occurred, or on the date when a fault was discernible.

The Court of Appeal recognised the longstanding difficulty for those designing and constructing buildings, where defects may not appear until decades after construction is completed. Those involved in design and construction were, therefore, potentially liable in negligence for decades after any claim under the original contract had expired. The Court of Appeal identified this as the key problem that section 134 seeks to address.

However, applying ordinary principles of statutory interpretation, the Court of Appeal stressed that section 134 "does not contain any reference to some distinction between limitation periods for actions in negligence as opposed to those in contract."

The Court of Appeal interpreted the Second Reading speech as reflecting an intention that section 134 would apply to claims in contract, based on the Minister's statement that "property owners would have additional protection in terms of years beyond the very short number of years that now exist."

The Court of Appeal referred with approval to Moorabool Shire Council v Taitapanui (2006) 14 VR 55. In that case, the Court expressed the view that section 134 of the Building Act created a particular limitation period in respect of building actions, whether founded in tort or contract.

Overturning Judge Shelton's finding, the Court of Appeal concluded that actions founded in contract fall within the scope of section 134 and may be brought within 10 years from the date of issue of an occupancy permit or final inspection certificate, regardless of whether there is a claim in tort.

Negligence and pure economic loss

One of Brirek's claims was for breach of a duty of care owed by McKenzie. The Court distinguished Brirek's loss from the normal type of pure economic loss in a claim for defective construction work. Brirek claimed financial loss relating to delay in completing construction, and the lower profit that resulted.

The Court of Appeal confirmed the trial judge's finding that McKenzie owed no duty to avoid causing Brirek this loss. To the extent that Brirek's loss arose out of McKenzie's negligence, its loss was "pure economic loss" which was not consequent upon any damage to persons or property or any physical defect in the property. The Court identified this as a unique type of loss, different from the usual "diminution loss" that arises from a decrease in the value of property by reason of inadequacy in its construction.

The Court's finding that Brirek had no claim for pure economic loss also turned on Brirek's lack of vulnerability (as an experienced property developer), and the failure of the Building Act to constitute a foundation for a duty of care in relation to the type of loss claimed.

Implications for principals and contractors in Victoria

Brirek has confirmed that the position in Victoria is that an owner or principal may bring a claim for breach of contract for defective building work within 10 years of the issue of an occupancy permit or final certificate. Ten years will be the absolute limit that applies even if the defect does not manifest within 10 years.

Because of legislative differences in other jurisdictions, the decision may not be applicable elsewhere.

Owners and principals now have greater certainty of recourse to compensation for defective work that manifests between six and 10 years after an occupancy permit or final certificate is issued, as they can rely on a breach of contract claim rather than the law of negligence.

The decision also means that the distinction between a "deed" and a "contract" is now less significant in Victoria. Some owners and principals preferred to use a deed as the basis of an agreement with a contractor. This was partly done because the limitation period to bring an action under a deed was longer than under a contract (15 years instead of six). The limitation period for latent defect claims brought under a deed is now likely to match the 10 year limitation for claims under contract in Victoria.

Finally, the case emphasises the need for contractors and consultants undertaking construction work (or design in relation to that work) to review their insurance arrangements in respect of defective building work regularly, in order to ensure that there is sufficient coverage to respond as and when a claim is made during the relevant limitation period.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.