Clarification of NSW building limitation periods: NSW Court of Appeal decision

By Michael Lake, Katherine Mackellar and Samuel Hamilton Lindsay.

In November 2020, the New South Wales Court of Appeal published its reasons in Bandelle Pty Ltd v Sydney Capitol Hotels Pty Ltd.¹ The Court affirmed that the Environmental Planning and Assessment Act 1979 (NSW) (EPA Act) provides a long-stop limitation period of 10 years for loss arising from defective building works, irrespective of when defects become apparent.

What this means for you

The Court of Appeal’s decision confirms that section 6.20 of EPA Act provides an absolute bar of 10 years from completion for claims arising from defective building works. Each case will turn on its own facts and merits. However, this decision provides the industry with greater clarity around effective limitation defences available to resist claims for latent defects or other actions relating to allegedly defective work.

Background

Facts

On 2 January 2017, a fire broke out on the ground floor of a building on George Street, Sydney. The fire activated the building’s sprinkler system, which caused damage to the property of Sydney Capitol Hotels (Capitol), a tenant of building’s fifth floor. The fire was said to have started due to defective construction of the building’s exhaust duct system. Capitol therefore brought proceedings alleging that the builder of the exhaust duct system (Bandelle) had breached a duty of care owed to it in carrying out those works.

The building had been constructed pursuant to a development consent granted before 1 July 1998. As such, the fire occurred and Capitol’s claim was brought more than 10 years after the completion of construction.

Bandelle argued that the claim was time-barred by virtue of section 6.20 of the EPA Act (set out  below). Capitol, on the other hand, argued that the limitation period in section 6.20 should be construed narrowly to apply to defective works claims between parties to a building contract. On this basis, Capitol argued that section 6.20 was not applicable to its claim because the parties were never in a contractual relationship.

Relevant provisions and previous decisions

Section 6.20(1) of the EPA Act provides:

A civil action for loss or damage arising out of or in connection with defective building work or defective subdivision work cannot be brought more than 10 years after the date of completion of the work.

The predecessor of section 6.20 (section 109ZK) was drafted in similar terms. Earlier appellate case law in relation to section 109ZK had held that the section regulated liability between those carrying out work (and those with responsibility for its sufficiency) and the ultimate beneficiaries of the work, rather than changing the scope of liability more generally. In particular, in Dinov v Allianz Australia Insurance,² the NSW Court of Appeal held that section 109ZK did not apply to an action brought by an insurer to enforce an indemnity under a home building insurance policy against the directors of an insolvent builder. The Court of Appeal in that case held that such an action was not one ‘arising out of or concerning defective building work’.

At first instance in the Capitol decision, Hammerschlag J indicated that he favoured a view that Capitol’s claim was covered by section 6.20.³ However, his Honour considered that he was bound to apply the previous interpretation given to section 109ZK in cases including Dinov, with the result that section 6.20 of the EPA Act did not apply to claims that were only ‘accidentally, incidentally or indirectly’ affected by defective construction.

Capitol was a tenant of the building and had no contractual relationship with the builder. Further, the losses were considered incidental to the defective building works: the fire had caused Capitol’s losses, rather than the defective construction of the building’s exhaust duct system. Accordingly, Hammerschlag J decided that the limitation period under section 6.20 of the EPA Act did not apply to Capitol’s claim.

The decision appeared to provide an avenue for owners and occupiers to circumvent the 10-year limitation period, and seek to pursue actions (at least in some circumstances) against builders in relation to building work completed more than 10 years before.

The Court of Appeal decision

The decision of Hammerschlag J was overturned on appeal. The Court of Appeal held that section 6.20 of the EPA Act applies to all claims for loss caused by defective building work, and is not limited only to claims for pure economic loss, related to latent defects, or brought by owners as opposed to tenants. As such, section 6.20 extended to Capitol’s claim for loss arising due to the fire caused by the defective exhaust duct system.

The Court of Appeal further confirmed that section 6.20 provides a 10 year long-stop limitation period which applies from when the works were completed, irrespective of when the defect becomes apparent.

Accordingly, a majority of the Court held that Capitol’s claim was barred by section 6.20, having been brought significantly later than 10 years after completion of the works.

This conclusion followed a detailed analysis of the legislative of history of section 6.20, in which the Court of Appeal considered a number of issues. These included:

• application of section 6.20 to pre-1998 work. Transitional regulations brought into existence when section 109ZK was initially introduced provided that the limitation period only applied to works completed under development consents granted after July 1998. The majority held that, since that transitional regulation had been repealed with effect from 2012 and no such limitation applied to section 6.20, the current limitation period applies to all works irrespective of when development consent may have been given. Emmett AJA, in dissent, held that section 6.20 only applies to building works conducted pursuant to development consents granted after July 1998.
• the period between s109ZK repeal and s 6.20 commencement. On a literal construction, section 109ZK was repealed on 1 March 2018, however due to the intricacies of the commencement and transitional provisions, section 6.20 did not commence until 1 December 2019. The Court unanimously found that section 6.20 applied from 1 March 2018 and that there was no gap where neither provision applied. The Court justified the departure from a literal transition by reference to the purpose of the provisions and their importance to public safety.

Interaction with Design and Building Practitioners Act 2020 (NSW)

The decision is significant in light of the Design and Building Practitioners Act 2020 (NSW) (DBP Act), which came into force on 11 June 2020. The DBP Act imposes a statutory duty of care on any person who carries out ‘construction work’ to exercise reasonable care to avoid economic loss caused by defects. The duty extends to a range of practitioners including those:

• carrying out building work (including residential building);
• preparing designs for building work;
• manufacturing or supplying building products used for building work; and
• supervising, coordinating or project managing the works listed above.

An action for breach of the new statutory duty, like the negligence action brought by Capitol, accrues when damage or loss is suffered. As such, the action may not accrue until a number of years after completion of the work. Further, the statutory duty has retrospective effect, extending to construction work completed before the commencement of the legislation (provided that any losses from a breach of duty arise within the 10 years immediately before 11 June 2020, or after that date).

However, the statutory duty is subject to the usual limitation periods under the Limitation Act 1969 (NSW), the Home Building Act 1989 (NSW) and the EPA Act, so the potential period of liability is not unlimited. The Court of Appeal’s decision provides welcome certainty as to the broad scope of application of s 6.20 of the EPA Act to actions brought in relation to the statutory duty.

Endnotes

1. Sydney Capitol Hotels Pty Ltd v Bandelle Pty Ltd [2020] NSWCA 303.
2. Dinov v Allianz Australia Insurance Limited (2017) 96 NSWLR 98 (Dinov), [107]. See also Australian Rail Track Corporation Ltd v Leighton Contractors Pty Ltd [2003] VSC 189.
3. Sydney Capitol Hotels Pty Ltd v Bandelle Pty Ltd [2019] NSWSC 1825, [23].