Commencing Legal Action Against Subcontractors

Changes brought about by the Home Building Amendment Act 2014 (NSW) to the Home Building Act 1989(NSW) mean that owners corporations can arguably commence legal action against subcontractors (who are solvent) for breach of statutory warranties where the building contract between the builder and developer was entered into after 1 March 2015.

This may prove particularly important if the builder and/or developer is insolvent as it may provide another avenue of recovery for an owners corporation or a home warranty insurer, acting under subrogation rights.

Steps to Take Prior to Commencing Legal Action

Before an owners corporation commences legal action against a subcontractor, it is important to take the following steps:

  1. Check to see if the subcontractors are solvent and licensed.
  1. Notify subcontractors within 6 months of the owners corporation becoming aware of defects for which they may be liable.
  1. Obtain an expert report identifying defects for which subcontractors are liable and enter into settlement discussions with the subcontractors regarding rectification of defects.
  1. If settlement discussions are not successful, make a complaint to NSW Fair Trading against the subcontractor (assuming they are solvent and licensed).

If the above steps are unsuccessful, or where the expiry of the limitation period is approaching, owners corporations should consider commencing proceedings against subcontractors for breach of statutory warranties and possibly misleading and deceptive conduct in relation to their documentary certification of their work in the appropriate jurisdiction.

Failure to Commence Proceedings

If an owners corporation fails to commence proceedings against a subcontractor for breach of statutory warranties prior to the expiry of the limitation period, and are entitled to make a claim against a home warranty insurer, the insurer may allege it can reduce its liability to the owners corporation by the amount it could have recovered against the subcontractor if the owners corporation had commenced proceedings against them within time.

Changes Arising out of the Strata Reform

The Strata Schemes Management Act 2015 (SSMA) commences on 30 November 2016. Relevantly for owners corporations considering commencing action against subcontractors, under the SSMA, the following is mandatory:

  1. Developers must provide initial maintenance schedules and the building contract to the owners corporation prior to the first Annual General Meeting (AGM).
  1. Each AGM must include a motion to consider building defects and rectification until the end of warranty periods for applicable statutory warranties under the Home Building Act 1989 for buildings of the strata scheme.

This is a complex area of law which remains largely untested. There is a decision from the Supreme Court of NSW which found that owners corporations cannot sue subcontractors for breach of statutory warranties. However this decision has not been appealed and we believe it may be incorrect. Actions against subcontractors for misleading and deceptive conduct are more difficult to succeed on as the evidence and legal elements needed to be proved are more complex. We are able to provide assistance to owners corporations in identifying subcontractors and taking steps to protect owners corporations’ rights against subcontractors.

 

***The information contained in this article is general information only and not legal advice. The currency, accuracy and completeness of this article (and its contents) should be checked by obtaining independent legal advice before you take any action or otherwise rely upon its contents in any way.

 

Prepared by Bannermans Lawyers

Updated 21 April 2017

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For more information on this topic or any legal enquiries please contact your Construction Team.

 
 

 

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