Breach of contract or breach of statutory warranty? A lesson on limitation periods

Part 2C of the Home Building Act 1989 (NSW) (HBA) sets out the statutory warranties which are implied into all contracts for residential building work. The statutory warranties are given by the holder of a contract licence (usually the builder) for the benefit of owners and serve as a guarantee that the works will meet a certain standard, for example, that the works will be done with due care and skill and will be in accordance with contract plans and specifications.[1] Section 18E(1) of the HBA provides that if a statutory warranty is breached, the limitation period for commencing proceedings is six years in the case of major defects, and two years in other cases.

In Onslow v Cullen [2022] NSWSC 1257, Justice Adamson considered the applicable limitation period where defective residential building works amount to both a breach of contract and a breach of the statutory warranties. The decision has important consequences for owners bringing a claim for breach of the statutory warranties, particularly in respect of non-major defects.

Facts

In January 2016, Mr Onslow, the builder, contracted with Mr and Mrs Cullen, the owners, to carry out building work on their residential property.[2] The contract was in the standard form issued by the Housing Industry Association (HIA) and clause 39 incorporated the statutory warranties into the contract.[3]

In April 2017, the builder left the property before completing the building works.[4] In August 2019, the owners commenced proceedings against the builder, claiming damages for breach of contract in respect of the incomplete works and certain defects in the completed works.[5] A dispute arose as to the applicable limitation period for the owners’ claim:

• The builder argued that the defects in the completed works were non-major defects, and therefore that a two-year limitation period applied to the claim under section 18E(1)(b) of the HBA.[6] Since the owners commenced the proceedings 2 years and 4 months after the builder left the site, this would mean that the portion of the claim relating to defects in the completed works would be statute-barred and the owners would be unable to recover.
• The owners argued that they had framed their claim as breach of contract, not breach of the statutory warranties, so a six-year limitation period should apply.[7]
• Both parties accepted that the incomplete works constituted major defects, and therefore a six-year limitation period would apply regardless of whether the claim was framed as breach of contract or as breach of statutory warranty.[8]

Limitation period: two years or six years?

Justice Adamson considered that the applicable limitation period for the non-major defects was two years.

Relevant principles from the Limitation Act 1969 (NSW) (Limitation Act)

While the limitation period for breach of contract is typically six years,[9] section 7(a) of the Limitation Act provides that where legislation specifies another limitation period, that other limitation period will apply. Therefore, Justice Adamson held that if the owners claim could be properly characterised as a claim for breach of statutory warranty, the two-year limitation period under section 18E(1)(b) of the HBA would take precedence over the typical six-year limitation period for breach of contract.[10]

Clause 39 of the contract

The owners’ argument that they had framed their claim as breach of contract, not breach of statutory warranty, did not impact the applicable limitation period. Justice Adamson emphasised that a statutory warranty is merely a contractual term which has been implied by statute.[11] The fact that the statutory warranties were expressly incorporated into clause 39 of the contract did not change the nature of the owners’ claim.

Justice Adamson construed clause 39 and held that the parties objectively intended that the statutory warranties would only be given in so far as is required under the HBA, i.e., that the warranties for non-major defects would only be given for two years. This was because:

• section 7(2)(f) of the HBA requires that the statutory warranties are included in the HBA;[12] and
• the statutory warranties in clause 39 were expressed subject to the qualification “to the extent required by the Act, the builder warrants that […]”.[13]

Other relevant considerations

Justice Adamson also highlighted section 18G of the HBA, which prevents parties from restricting or removing statutory warranties “to remove the rights of a person”. His Honour emphasised that “a person” in section 18G applies equally to builders as well as owners, and a builder has a right not be sued in respect of non-major defects after the two-year period has expired.[14] Section 18G therefore provided support for the construction that the applicable limitation period in respect of the non-major defects was two years.

Finally, Justice Adamson noted that the contract was in the standard form issued by the HIA. Accordingly, it could not be described as having been “prepared by the builder” and therefore could not be construed against the builder.[15]

Decision

Justice Adamson held that the owners’ claim in respect of the non-major defects, being the defects in the completed works, was governed by the two-year limitation period in section 18E(1)(b). As a result, this portion of the owners’ claim was statute-barred, and the owners could not recover this amount.[16]

Take home tips

In cases involving defective residential building works, owners should avoid delay in commencing proceedings. Even where a contract is in place, a short limitation period may apply if the defects are non-major.

Owners should seek legal advice promptly to preserve their ability to commence proceedings. Bradbury Legal is experienced in advising both owners and builders in respect of defective residential building works, both before and during litigation. For specialist and tailored advice, please contact a member of our team by phone on (02) 9030 7400 or by email at info@bradburylegal.com.au.

[1] Home Building Act 1989 (NSW) s 18B(1)(a).

[2] Onslow v Cullen [2022] NSWSC 1257, [1].

[3] Onslow v Cullen [2022] NSWSC 1257, [10]–[13].

[4] Onslow v Cullen [2022] NSWSC 1257, [1].

[5] Onslow v Cullen [2022] NSWSC 1257, [2].

[6] Onslow v Cullen [2022] NSWSC 1257, [2].

[7] Onslow v Cullen [2022] NSWSC 1257, [29].

[8] For the limitation period for breach of contract, see Limitation Act 1969 (NSW) s 14(1)(a). For the limitation period for breach of statutory warranty which results in a major defect, see Home Building Act 1989 (NSW) s 18E(1)(b).

[9] Limitation Act 1969 (NSW) s 14(1)(a).

[10] Onslow v Cullen [2022] NSWSC 1257, [52].

[11] Onslow v Cullen [2022] NSWSC 1257, [58].

[12] Onslow v Cullen [2022] NSWSC 1257, [55]–[56].

[13] Onslow v Cullen [2022] NSWSC 1257, [56].

[14] Onslow v Cullen [2022] NSWSC 1257, [59]–[60].

[15] Onslow v Cullen [2022] NSWSC 1257, [61]–[62].

[16] Onslow v Cullen [2022] NSWSC 1257, [63].