During this unprecedented time of increases in interest rates, labour and material shortages, a large number of builders that entered into fixed price contracts has suffered financial harm. As a result, many builders have been forced into administration or liquidation. This has created fear and uncertainty in the Australian building and construction industry and left many home-owners asking questions.
A recent example of this has been the liquidation of Porter Davis, the 12th largest home builder in Australia. This has come following the liquidation and insolvency of many other home builders across Australia. It is likely that other builders will follow Porter Davis into insolvency.
When a builder becomes insolvent and enters administration or liquidation the impact on customers with contracts with the builder is financially significant. In addition to the financial harm caused by the insolvency of the builder, home-owners should seek legal advice on a range of issues arising from the insolvency of the builder. We expand upon the specific issue of intellectual property and domestic building warranty insurance below.
We have also published an article which provides some commentary on the issue of what to do if you builder becomes insolvent which you can read here.
We recommend that you seek legal advice on these issues to mitigate the risks associated with the insolvency of your builder.
Intellectual Property Issues?
Some owners provide the plans and specifications for the works to the builder and engage the builder to carry out the relevant works.
However, many builders provide owners with the specifications and plans for the domestic building works. For example, many builders offer a range of pre-designed homes or template homes styled on display homes or otherwise. In this scenario, if the owner terminates the building contract or purports to do so, any rights that the owner may have had to use the specifications and plans to complete the works under the contract or otherwise at law may well also end or terminate. This may put the owner in a difficult position of, on the one hand, being required by the planning permit and building permit to build the works according to the plans and specifications but, on the other hand, having no contractual or legal rights following the termination of the building contract to use and rely upon the plans and specifications to complete the works with another builder.
We recommend that before owners look at terminating a building contract that they seek advice on this specific intellectual property issue and what can be done to mitigate or avoid this risk from crystallising.
For more information please click here to see an article concerning intellectual property
Domestic Building Warranty Insurance
Domestic building warranty insurance (DBI) is an insurance policy taken out by the builder for the benefit of a homeowner for all domestic building works carried out by the builder. The scope and coverage of such insurance depends upon the legislative requirements in each State and Territory in Australia. For example, in Victoria, DBI insurance is mandatory and must be taken out for works with the value of the work exceeding $16,000 and if no exclusions apply (the key exclusion being for works of over three (3) storeys).
Prior to the commencement of any major domestic building contract, the builder must ensure that they have obtained a DBI policy that specifically lists the homeowner as the insured and that details the address of the property.
The insurance cover is a ‘last resort’ form of insurance. What this means is that DBI only applies and is only ‘triggered’ in the event that the builder dies, disappears or become ‘insolvent.’ There is case law on what each of these terms means. The liquidation of the building company typically acts as a trigger for DBI. Effectively, DBI is last resort insurance for the homeowner in the event of the insolvency or disappearance or death of the builder.
In Victoria, for all policies issues after 1 July 2014, homeowners are covered for the additional costs of completing the domestic building works (capped at twenty percent (20%) of the contract sum) and provides coverage for the cost of rectifying defective works up to the maximum value of the DBI policy as listed on certificate of insurance (with a maximum coverage of $300,000).
If and when the DBI policy is triggered, homeowners are covered for the cost of rectifying structural defects (up to six years from the date of completion or work or termination of the building contract) and non-structural defects (up to two years after the completion of the work or termination of the building contract) and other losses suffered such as removal and storage subject to the terms of the underlying policy. The extent of coverage depends upon the policy wording which applies to the specific DBI policy.
In relation to incomplete and domestic works, the homeowner should engage an expert to prepare a comprehensive report detailing the incomplete and defective works. Such a report should ideally differentiate between structural and non-structural defective works including the scope of rectification costs.
In the case of the insolvency of some volume builders in recent months, there has been some speculation that some builders, in breach of legislative requirements, may not have obtained DBI policies for home-owners. If so, it is likely that those home owners will not have any DBI policy upon which they can claim.
In most States and Territories in Australia builders have a mandatory legal requirement to obtain cover for homeowners. For example, in Victoria it is an offence to work as a RBP without required insurance, specifically, section 136 of the Building Act 1993, provides that ‘a builder must not carry out or manage or arrange the carrying out of domestic building work under a domestic building contract unless the builder is covered by the registered insurance’. If a builder is found to be carrying out or managing the domestic building work, he / she may receive a penalty in the order of 500 penalty units (equating to approximately $92,460).
If the Victorian Building Authority is notified that a builder does not hold the mandatory insurances, they must suspend their registration. During such suspension, the builder will be prohibited from working as a builder for the length of the suspension. For further information in relation to conditions / restrictions applied to a RBP, please click here.
It is essential that, if you have engaged a builder, to carry out domestic building works which exceed $16,000, prior to the builder commencing any work on your property, you request a copy of the DBI policy. When reviewing that policy you should ensure that it covers your property; lists you as the insured and specifies the correct company / builder as listed in the building contract and on the building permit. If you have any questions about this we recommend that you seek legal advice.
If you have recently engaged a builder (including a volume builder) that has entered into liquidation or administration or if you are concerned about their financial position, please contact one of our lawyers in the Building & Construction team at Cornwalls. We can assist you with obtaining legal advice on the merits of making a claim and / or assist with applying for a claim under the DBI in your name. If you intend to make a claim, please note strict timeframes and exclusive apply under the respective insurance policy wording.
Queensland Home Warranty Insurance
In Queensland home warranty insurance is required for most residential work valued at more than $3,300 (including GST) under the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act). Under the QBCC Act DBI arises for relevant domestic building works as a matter of law, the builder is not required to take out a policy for the benefit of home owners. The scope and extent of coverage under the QBCC Act differs from that under the Victorian legislation.
You should seek legal advice on the insolvency of any builder and the issues arising from that. Advice should be sought promptly as time limits apply, exclusions apply for DBI and a failure to take prompt and comprehensive advice may cause you significant prejudice.
For further information regarding this article, please contact the authors or any member of our Building & Construction team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.