Storm Clouds Gather for Owners Corporations [ACT version]

On 8 October 2014, the High Court handed down its decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor [2014] HCA 36 which has serious implications for apartment owners in the ACT.

The case involved a long-running dispute between the appellant builder, Brookfield, and the respondent owners corporation with respect to building defects in the common property of a commercial building, being The Mantra Chatswood Hotel, a serviced apartment business.

The Court adopted the case-by-case approach prescribed by previous judgments in this area and held that the builder did not, in these circumstances, owe the owners corporation a duty of care to exercise reasonable care in the construction of the building to avoid causing the owners corporation economic loss resulting from latent defects in the common property.

There were two questions that the Court answered in coming to its ruling: firstly, whether the builder owed a duty of care to the developer and, secondly, whether the builder owed a duty of care to the owners corporation independently of any duty of care to the developer.

With regards to the first question, the Court held that the developer, who originally contracted with the builder, sufficiently protected itself and was not ‘vulnerable’ to the builder’s conduct in the legal sense (vulnerability being a legal requirement for a duty of care to exist).

The Court pointed out that the contract between the builder and the developer contained numerous stringent clauses holding the builder accountable for building defects. It stated that, to supplement the contractual provisions with a duty of care towards the developer would inappropriately alter the allocation of risk effected by the parties’ contract. Therefore, there was no duty of care. And, if no duty of care was owed to the developer, it would be difficult to argue that a duty of care should flow to a subsequent owners corporation as a subsequent owner.  That is, the subsequent owner should not hold greater rights than the original owner, being the developer.

In relation to the second question, the Court held that the builder did not owe a duty of care to the owners corporation independently of its obligations to the developer. As the owners corporation did not exist at the time the defective work was carried out, there could not have been any reliance by the owners corporation upon the builder. Furthermore, the Court held that the owners corporation did not suffer any loss because it acquired the common property without any outlay on its part.

Consistent with its case-by-case approach, the Court distinguished this case from the previous case of Bryan v Maloney (1995) 182 CLR 609 where a subsequent owner successfully argued that a builder of a residential house was liable for economic loss arising from building defects. The Court held that the contractual protections provided to the original owner and subsequent purchaser in Bryan v Maloney were far less than those offered in the current case and consequently, a duty of care arose in Bryan v Maloney.

However, the Court also made it clear that it was inappropriate to use the mere nature of the purchase (i.e. whether it was a commercial or residential property) as the decisive factor in determining whether a duty of care exists. Rather, the salient features of the relationship between the builder and the owners corporation, including whether the builder owed the developer a relevant duty of care, must be considered.

The main practical outcome for residential apartment owners is that it will be generally much more difficult for them to succeed when suing builders in negligence for building defects in lot or common property. In particular, owners corporations will need advisors to carefully analyse the contracts relating to the development, construction and conveyance of apartments to determine the precise level of contractual protection afforded to the relevant parties. Indeed, it is fortunate that the Court left it open that such matters must be decided on a case-by-case basis, rather than set out a blanket rule that builders do not ever owe a duty of care to owners corporations.

Finally, owners will now have to rely more heavily on state and territorial government statutory warranty regimes and act rapidly to not fall foul of limitation periods. Unfortunately, these statutory warranty regimes tend to be more limited in scope than negligence. In the ACT, the statutory warranties under the Building Act 2004 do not apply to buildings over 3 storeys and, consequently, owners of apartments in larger buildings will either need to argue that their situation falls into a category where a duty of care exists, or alternatively, find some other non-tortious cause of action to rely upon.

Authors: Christopher Kerin & James Qian

E: christopher@kerinbensonlawyers.com.au & james@kerinbensonlawyers.com.au

Cracking Phoenix Eggs

It has been reported that the Australian Securities and Investments Commission, Australian Tax Office and Fair Work Building and Construction have recently begun cooperating to crack down on builders liquidating their companies to avoid repaying creditors including the Tax Office, employees, and contractors.  In particular, the Tax Office is compiling evidence given to it by a number of large construction firms for the purpose of determining whether criminal charges should be laid against directors who instigate phoenixing activity.

By way of background, a company is typically an entity whose owners (the shareholders) have what is called ‘limited liability’.  This means that a given shareholder or director is not personally liable for any of the debts of the company, other than for the unpaid value of his or her investment in that company.

For example, let’s say that there existed a company that had $10 million in debts and no assets.  A director of that company holds one share and has $5 million in personal assets including a yacht and a few million dollars in spare cash under his sofa.  If the company were to be wound up, the director / shareholder would only be legally liable for any unpaid portion of the amount he invested in the company (which could be as little as $1) and not his yacht or cash.  The legal protection offered to the above shareholder and director to prevent company creditors from touching his personal assets is referred to as the corporate veil.

Not surprisingly, the corporate veil can easily be manipulated at the expense of legitimate creditors.  One instance of this is companies engaging in ‘phoenixing’ behaviour.  Phoenixing involves a company being deliberately wound up to avoid the payment of debts.  In its place, a new company is founded which performs substantially the same services with a clean slate.  That new company, in a sense, ‘rises from the ashes’ of the wound-up company.  It would be reasonable to say that the phenomenon of company phoenixing (using $2 companies in particular) is one of the most infamous abuses of the corporate veil ever devised.

There are very limited circumstances where the corporate veil can be pierced.  The two most likely scenarios are breaches of directors’ duties and insolvent trading.  However, neither scenario is particularly helpful in the context of building defects.  Firstly, it is highly unlikely that a court would accept that a director of a company which engaged in defective building work is in breach of his or her directors’ duties.  Secondly, even if a director is found to have engaged in insolvent trading, creditors still need to prove their loss and damage and then stand together with all the other creditors to recover that loss and damage.

Given that phoenixing is rife in the construction industry, it appears to be a belated response.  As we reported in March this year, there have been previous attempts by the Commonwealth Government to discourage such behaviour legislatively.

However, it may be premature to celebrate if you are a long suffering owners corporation or lot owner whose building is riddled with defects.  Even if the Tax Office gets its hands on those directors, it will be for the purpose of either putting them in jail or to reclaim unpaid tax debts and superannuation.  That is, after the Tax Office, the employees and contractors have taken their cut, there may be no meat left on the metaphorical carcass to pick, nor does the Tax Office care.  Therefore, this crackdown, as noble as it sounds, will not assist those owners corporations which suffer from building defects.

Authors: Christopher Kerin & James Qian

E: christopher@kerinbensonlawyers.com.au & james@kerinbensonlawyers.com.au

Why Balconies Leak

Ross Taylor & Associates’ famous “Why Balconies Leak” video – Everything you need to know about balcony leaks, but were too afraid to ask.

httpss://youtu.be/pkc4-9RbRuU

Kerin Benson Lawyers Guide to Obtaining a Rectification Order

This is a brief outline of what occurs during the process of obtaining a rectification order from the ACT Planning and Land Authority (ACTPLA or otherwise known as the Environment and Sustainable Development Directorate) against a building licensee (including a nominee of the builder).

The information contained in this guide is for informational purposes only and is current as at 18 July 2014. It is not legal advice. The reader should consult a suitably qualified lawyer regarding any specific legal problem or matter.

Complaint is lodged:

The first step is that a complaint is lodged. ACTPLA has prepared a standard complaints form. Kerin Benson Lawyers can complete the form, and in support, draft submissions, obtain the relevant experts’ reports and prepare witness statements to augment the complaint.

This may take a few weeks depending upon the complexity and quantity of the defects, the capacity of the various experts to provide reports and the ability to prepare witness statements in a timely manner.

ACTPLA prioritisation:

After ACTPLA receives a complaint, it prioritises it by the number and severity of defects, so it can direct resources to matters of the highest risk to the community.

Complaints with a risk to public safety are treated as priority one and ACTPLA aims to inspect them within 24 hours of receiving a complaint. Complaints about a serious breach, which are not a safety risk, are treated as priority two and are inspected within 24 to 48 hours of receiving a complaint.

All other complaints are priority three and are investigated as resources allow, taking into consideration the changing number of priority one jobs. In our experience, notwithstanding these KPIs set by ACTPLA, there is a long waiting period for complaints relating to both priority two and three defects.

30-day progress report:

ACTPLA represents that complainants will be:

  1. provided with an update in writing on the progress of the investigation within 30 working days of receipt of the complaint; and
  2. informed of the significant milestones and finalisation of the complaint.

However, specific details and actions of ACTPLA’s investigation will not be disclosed to the complainant. This apparently is a consequence of the Privacy Act 1988 to protect the private information of individuals involved and to avoid prejudice in any potential litigation.

Unfortunately, from our experience in dealing with ACTPLA, the above updates and information are not necessarily provided.

Inspection:

As part of its investigation, ACTPLA will request that the complainant grants it access to the complainant’s property to investigate the alleged defective works. ACTPLA will advise the complainant of when the inspection is to take place.

We note that, if a builder requests access to the building, the complainant should grant access on the condition that the builder is escorted at all times and their activities monitored.

Requests for further information:

Following the inspection, but occasionally before, ACTPLA may request further information from the complainant depending upon the complexity of the defect, and/or if the defect requires specialist knowledge to understand.

At Kerin Benson Lawyers, our strategy is to frontload as much of the supporting evidence for the defects as possible. This is then likely to save costs, time and effort that would otherwise have been expended in engaging in a drawn-out iterative process of ACTPLA and the builder requesting, and the complainant subsequently providing further information.

It presently takes on average 2 years for a rectification order to be issued for non-life threatening defects. However, Kerin Benson Lawyers have been able to procure such orders in 6 months, although actual experience has varied. This is because ACTPLA’s workload has been increasing exponentially in the last 3 years. In 2010/11, ACTPLA reported that it had managed 14 complex cases, including 7 litigated matters. In 2011/12, this increased to 46 complex cases, including 17 litigated matters. Furthermore, in 2012/13, ACTPLA managed 84 complex cases, of which 13 were litigated.

Disciplinary sanctions against builders are rare. In 2010/11, 313 complaints were filed against builders but no disciplinary sanctions were handed down. In 2011/12, 303 complaints resulted in 3 builders being disciplined. In 2012/13, 303 complaints resulted in no disciplinary sanctions. Therefore, over the last 3 years, 919 complaints resulted in only 3 instances where disciplinary action against builders occurred – a conversion rate of less than 0.4%.

Our anecdotal experience is consistent with the above figures. ACTPLA is becoming much slower to respond to such complaints. Nevertheless, our perseverance in emphasising to ACTPLA the importance of our client’s matter, has assisted in a faster turnaround time on average than complaints which are unassisted.

Requests for responses from the builder:

To ensure procedural fairness during the investigation, ACTPLA will approach the builder to ask for its response to the issues the complainant has raised in relation to the alleged defects.

If the builder replies, the process may be extended due to the parties having to argue their respective points. We are unable to give a definitive estimate as to how long this process takes. However, the best method to mitigate the impact of a prolonged dispute is to bring compelling evidence substantiating the defects in the first instance.

Decision and further steps:

Eventually, ACTPLA will make a decision as to whether to make, or decline, a rectification order. Ideally, if ACTPLA makes a rectification order, the builder will comply and undertake the rectification works, saving any further action by the complainant.

If the builder refuses to comply with the order, ACTPLA can impose a fine upon the builder. On 6 March 2014, the fines for non-compliance with a rectification order were increased to maximum penalties of $280,000 for an individual and $1,400,000 for a corporation (up from $28,000 and $140,000, respectively).

ACTPLA can also engage (and pay) a third-party builder to do the work required to be completed by the rectification order and then seek to recover that cost from the original builder. ACTPLA may also order (and pay) another builder to complete this work if it considers that the original builder is unsuitable for the work (eg because the original builder does not have sufficient competence).

However, the above may not occur due to funding issues which have recently plagued ACTPLA. There have been a few cases where ACTPLA has issued a rectification order on a builder but was unable to pay a third-party builder to carry out the works due to a lack of funds. This resulted in a breakdown of the process and further delays in the rectification of defects.

Appeal rights:

If you are dissatisfied with the outcome, you may appeal the decision in the ACT Civil and Administrative Tribunal (ACAT). We note that the builder may also appeal the decision if it is dissatisfied with the outcome. The appeal, called a ‘merits review’ involves ACAT stepping into the shoes of ACTPLA and making a fresh decision based on the facts.

Appeals from ACTPLA’s orders are also increasing. In 2010/11, there were 2 appeals to ACAT. In 2011/12, this figure had increased to 12. Comparatively, in 2012/13, there were 23 appeals to ACAT, 4 of which were directed to the ACT Supreme Court. Builders regularly appeal decisions that are unfavourable to them in connection with rectification orders involving large apartment complexes.

To reserve their rights, we recommend owners corporations pass a resolution at general meeting authorising the executive committee to engage in a merits review application before any decision by ACTPLA is handed down. This is because, under the ACT Civil and Administrative Tribunal Act 2008, an application to ACAT for review of ACTPLA’s decision must be made within 28 days after the day the decision is handed down (in practise, this is the date of the letter of decision). Such a timeframe will not allow the holding of a general meeting to approve the appeal within the required period following receipt of the decision.

Having indicated this, an appeal by a complainant would only be required if ACTPLA decided not to issue a rectification order or, issued a rectification order that did not address a sufficient number of defects. The appeals referred to above usually involve the building licensee as the appellant.

Kerin Benson Lawyers can draft a model resolution to be passed at a general meeting if instructions are given to do so.

Further information:

If you believe that your apartment is affected by defects and would like further information or assistance in relation to the rectification order process, please contact Christopher Kerin on (02) 8706 7060.