Implied conditions & warranties for home building contracts

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Following changes to the Home Building Act 1989 (NSW) in early 2015, the statutory insurance scheme that was established to provide compensation for certain defined losses if a builder dies, becomes insolvent, disappears during a build or fails to comply with a money order from a Court or Tribunal was re-named and is now referred to as the Home Building Compensation Fund.

Along with the re-naming of the scheme a number of other changes were made in respect of warranty insurance and implied warranties and conditions in building contracts entered into in NSW. These changes and the issue of implied conditions are discussed in further detail below.

What is covered by warranty insurance under a building insurance contract?

From 15 January 2016 an insurance contract issued in respect of building work in NSW must provide coverage and indemnity for losses or damage sustained by a beneficiary in respect of residential building work which has arisen because of the suspension of a contractor’s licence as a result of non-compliance by the contractor with an order.

Contracts entered into after 15 January 2016 in NSW only cover residential building work that is required under the Act to be covered by a certificate of insurance. This means that work such as built-in furniture and cabinetry which is done as standalone work and not part of a broader residential building contract is now exempt from the mandatory insurance scheme. For many would be renovators and home owners it is relevant to note that this category of work includes kitchen cabinets.

Statutory warranties

Builders must now provide a 2 year post completion warranty for their work. This period rises to 6 years in the case of ‘major defects’. Major defects are defined as being something that is a major element in a building AND which prevents all or part of the building form being either lived in or used for its intended purpose OR which threaten the collapse or destruction of the building as a whole of part of it. The concept of ‘major defects’ replaces the previous 6 year statutory warranty for ‘structural defects’.

Rectification orders may be issued by NSW Fair Trading Inspectors which require completion of rectification work in specified stages and by certain dates. These orders can also include an order for the payment of any money that is due under the contract.

Under the current legislation rectification work is specified as the preferred outcome of any proceedings before a Court or Tribunal for building claims.

Implied conditions and warranties

Section 18B of the Home Building Act 1989 (NSW) provides that all contracts for residential building work in NSW entered into by the holder of a contractor licence or a person required to hold a contractor licence before entering into a contract, will contain the following implied conditions and warranties:

  • All work will be done with due care and skill and in accordance with plans and specifications as set out in the contract;
  • All materials supplied will be good and suitable for the purpose for which they are being used and, unless otherwise specified in the contract, those goods will be new;
  • Work will be done in accordance with the legislation or any other law;
  • Work will be done with due diligence and within the time specified in the contract. If no time period is specified then work will be done ‘within a reasonable time’ ;
  • Where the work under the contract relates to the construction, alteration or additions to a dwelling the work will result in a dwelling that is reasonably fit for occupation as a dwelling (to the extent of the work conducted);
  • Materials used in doing the work will be reasonably fit for the specified purpose or the result being sought, provided the owner for whom the work is done expressly makes known the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder’s or person’s skill and judgment.

These statutory warranties cover both a principal contractor in respect of their relationship with the owner of land on which work is being carried out and are also implied into contracts where the principal contractor has contracted any part of the work to a subcontractor.

What if there has been a breach of a statutory warranty?

Previously the defence available to a builder or contractor to a claim of breach of statutory warranty was that any defective work was carried out on the instructions of the consumer and was done so contrary to the builder or tradesperson’s written advice.

Post 15 January 2016, a builder or tradesperson can also defend this type of claim on the basis that any defective work was carried out as a result of the builder or tradesperson acting on written instructions from a professional engaged by the consumer before the builder or tradesperson commenced work.

The professional in question can be an engineer, surveyor or architect or some other person with appropriate specialist or expert knowledge that was relevant to the building work in question. Critically that expert must be someone who is independent from the builder or tradesperson about whom the claim has been made.

In an ideal world construction projects would progress smoothly and the need to consider issues of insurance and implied conditions would not arise. Unfortunately this is not always the case and knowing where you stand with respect to warranty insurance as well as implied contractual conditions is likely to be an important part of successfully managing any build. It is always a good idea to seek legal advice before a situation becomes problematic as this can avoid costly unpleasant surprises down the track.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email [email protected].