Andrew Hales | Tom Ward | Luke Sundercombe
The Appeal Panel of NCAT interpreted the limitation of liability clause in the NSW Residential Building Contract for Renovations and Additions, which is the Housing Industry Association’s (HIA) standard form contract, as offending the ‘no contracting out’ provisions of the Home Building Act 1989 (NSW) on the basis that the clause limits the rights of a person to whom the statutory warranties are owed. NCAT read down the limitation of liability clause in the standard form contract.
In this case, the Appeal Panel heard an appeal concerning defective building work performed by Life Structures Pty Ltd (contractor). The contractor appealed on 4 grounds. The focus of this update is ground 1 of the appeal.
Ground 1 alleged that the Tribunal had erred on a question of law by reading down the terms of clauses 36.2(c) and (e) of the HIA’s standard form contract by reference to section 18G of the Home Building Act 1989 (NSW) (HBA).
Clause 36.2 of the HIA contract, entitled ‘Risk’, provided:
The builder is not responsible for:
(a) loss or damage to the owner’s property or property for which the owner is responsible that is left on the site;
(b) subject to Clause 36.2(c) any defect, structural deficiency, settlement or deterioration in the existing building except to the extent that it is caused by the builder failing to take reasonable care in carrying out the works;
(c) damage to ceilings in the existing building except to the extent that it is caused by the builder failing to take reasonable care in carrying out the building works, but then only to the extent of repairing and excluding any repainting;
(d) damage to paths, gardens, driveways, trees, lawns and other landscaping; and
(e) the restoration of areas affected by the building works to their original condition.
Section 18B of the HBA details the statutory warranties. The warranties apply to all contracts to perform residential building work in NSW. To understand those warranties see NEW SOUTH WALES – Construction Law Made Easy.
Section 18G of the HBA provides:
A provision of an agreement or other instrument that purports to restrict or remove the rights of a person in respect of any statutory warranty is void.
Section 18G of the HBA was considered by the Supreme Court of NSW in Cappello v Hammond & Simonds NSW Pty Ltd  NSWSC 1021 (Cappello), in which the operation of the liquidated damages clause in the HIA Contract was in issue.
The Appeal Panel noted in respect of Cappello that when a liquidated damages clause is not found to be void by reason of being a penalty, it can operate as a floor or ceiling. As a floor, it operates to provide an amount that can be awarded in damages without the need for proof. As a ceiling, it operates to limit the amount of liquidated damages that may be awarded.
In Cappello, the liquidated damages clause was held to be contrary to section 18G of the HBA when it operated as a ceiling, and was therefore read down only to operate as a floor.
To that end, the HIA Contract has a ‘severance’ clause which permits clauses to be read down so that any illegal, void or unenforceable clause would be ineffective to the extent only of such illegality, voidness or unenforceability.
At first instance, the Tribunal found that the effect of clauses 36.2(c) and (e) of the HIA Contract was to convert an owners’ substantive right to damages to one of nominal value, in that it prescribed and limited the circumstances in which the builder would be liable to the owner in a confined way, and was therefore contrary to section 18G of the HBA for limiting the owners’ rights in respect of the statutory warranties.
The contractor submitted that there was misplaced reliance on Cappello and that the effect of clause 36.2(c) and (e) of the HIA Contract was not to convert a substantial right of damages into a nominal one and that the contractual provisions had ‘a legitimate basis in the freedom of contract’.
The owner submitted that the fact that clause 36.2 of the HIA Contract would operate to constrain a right in relation to the breach of a statutory warranty under section 18B of the HBA was sufficient for section 18G of the HBA to operate.
The Appeal Panel found that there was no error of law in the first instance decision and that leave to appeal should be refused.
The Appeal Panel discussed the compensation available to plaintiffs in contract and negligence, noting that for breach of statutory warranties, plaintiffs are to be put in the same position they would have been as if the breach had not occurred (Haines v Bendall  HCA 15). Where there has been defective work, the rectification method must be both necessary and reasonable (Bellgrove v Eldridge  HCA 36).
In respect of negligence which was considered to be called by the words ‘failing to take reasonable care’ in clause 36.2(c) of the HIA Contract, the Appeal Panel noted that compensation is available to put the plaintiff in the same position as if the tort had not occurred.
The Appeal Panel found that clause 36.2(c) of the HIA Contract restricted the owner’s rights in three ways:
- by confining the contractor’s liability to a failure to take reasonable care, which was clearly much narrower than the ambit of the statutory warranties;
- by confining the owner’s compensation to repair, which could be said to disentitle compensation for replacement; and
- by excluding any repainting.
In respect of clause 36.2(e) of the HIA Contract, the Appeal Panel considered that if it was intended to restrict a claim in circumstances where replacement rather than repair is considered appropriate, then it operates to restrict a right provided by the statutory warranties.
Accordingly, the Appeal Panel considered that clauses 36.2(c) and (e) of the HIA Contract could be read down to the extent that they are impermissible with the HBA, as was done in Capello. However, the Appeal Panel was reticent to make a general pronouncement as to the validity of clauses 36.2(c) and (e) of the HIA Contract, as their operation in each case will depend on the individual circumstances of the case.
In respect of clause 36.2(b) of the HIA Contract, the Appeal Panel considered that given that the clause confined liability to the failing by the contractor to take reasonable care, it too offended the HBA by limiting the statutory warranties and could be read down to the extent that they are impermissible with the HBA.
In respect of clause 36.2(a) of the HIA Contract, the Appeal Panel was fast to identify that it restricted or removed rights provided by the statutory warranties, and considered that it may also therefore also be rendered void by section 18G of the HBA.