Recent Changes to Residential

Builders’ Responsibilities

Prepared & presented by Geoff Hardy

for the

CCH Learning

Building & Construction Conference 2015

24 September & 22 October 2015

The History of Part 4A of the Building Act

• A consolidation of all the “consumer” provisions

• Based on a popular misconception that builders were

unaccountable for their work

• In fact building companies and their owner/operators

in control of a site were already liable under four laws

• Building amendment Act 2013 supplemented these

• Came into force on 1 January 2015

• Just two working weeks after the Regulations

• Applies to residential contracts, but not subcontracts

• “Building work” does not include design work

The Curious “Consumer” Reference • 362A Outline of this Part “This Part protects

consumers (referred to in this Part as clients) in

relation to residential building ...”

• There is no definition of consumer, no criteria for

qualifying as one, and no further mention of the term

• In fact Part 4A protects residential homeowners, not

consumers

• All of the new rights are conferred on the “client”

under a “residential building contract”

• A client is someone who engages a builder to do

building work in relation to a “household unit”

A Summary of the Recent Changes

Part 4A now protects homeowners in the following ways:

1. Pre-contract checklist & disclosure statement

2. Minimum requirements for residential building

contracts

3. New remedies for breach of the implied warranties

4. Remedy for defects notified within 12 months of

completion

5. Information & documents required on completion

6. Commercial on-sellers must obtain CCC before

settlement or possession

The Checklist • If the contract price exceeds $30,000, or if the client

requests it, there are two documents that must be

disclosed by the builder to the client “before the contractor

and the client enter into a residential building contract”

• They are a checklist and a disclosure statement

• The checklist has been written by the Government

• It cannot be modified or added to in any respect

• It urges the homeowner to carefully consider the risks

• But it also advocates for certain contractual outcomes (eg.

“get detailed quotes, not estimates”)

• Which may not necessarily be appropriate in each case

The Disclosure Statement

• “Information” about the building contractor & key contact

person, “details” of insurance, and “information” about all

product warranties or guarantees offered by the builder

• The disclosure statement must include details of each

insurance policy the builder has or intends to obtain in

relation to the building work, the amount of cover under

each policy, & the relevant exclusions on policy coverage

• There are 18 different types of policy a builder might have

• Unless the builder’s insurance broker gives the builder an

accurate summary of the insurance policy exclusions, he

would need a law degree (let alone literacy) to do it himself

The Disclosure Statement • Does “any guarantees or warranties the building contractor

offers” include manufacturers’ warranties & guarantees?

• Or just those promises about materials or workmanship

that the builder makes directly to the client, that are either

expressed in the contract, or implied by law?

• Assuming the former, how do you know what third party

warranties will be available, at the pre-contract stage?

• Describing the period of cover may not be straightforward

• How do you accurately describe the relevant exclusions or

limits on cover in each guarantee or warranty, particularly

when manufacturers change their terms?

Residential Building Contracts

• If the price is $30,000 or more the residential building

contract must be in writing (Building Act s.362F)

• Presumably that means wholly in writing, not partly

written and partly oral (eg. a written quote with terms

of trade, plus an orally agreed completion date)

• The contract “must” be dated

• It must also comply with the Building (Residential

Consumer Rights and Remedies) Regulations 2014

• Which means it “must contain” certain provisions

• A builder must not “enter into” a residential building

contract unless those requirements are met

Residential Building Contracts

• If there is a residential building contract for a price of

$30,000 or more that is not reduced to writing at all,

then it is “deemed to include” the terms prescribed in

Schedule 3 of the Regulations (Reg. 7)

• The heading to Reg. 7 talks of “oral” residential

building contracts, whereas the heading to Reg. 8

talks of “incomplete” written building contracts

• In practice there is rarely a building contract that is

wholly oral, and not at least partially written

• There will invariably be a written plan, quote, scope,

email, discussion note, or building consent application

Residential Building Contracts

• Schedule 3 of the Regulations contains default

clauses dealing with building consents, code

compliance certificates, variations, payments, sub-

contractors, dispute resolution, and notices

• If they only apply to purely oral contracts, will they

ever apply at all?

• If there is a written contract but it does not address all

of the mandatory topics, the relevant Schedule 3

default clauses fill the gaps (Reg. 8)

• Presumably these default clauses override any oral

agreement between the parties on those topics

Residential Building Contracts

• What are the consequences if the Builder enters into

a residential building contract for $30,000 or more that

is not reduced to writing at all?

• He can be fined up to $2,000 or spot fined $500, and

the parties get all the Government clauses by default

• What are the consequences if the Builder enters into

a building contract for $30,000 or more that is partially

or wholly written but does not address all of the

mandatory topics?

• The Government’s clauses will apply to the extent

they are not already dealt with in the written contract

The Homeowner’s Instruction Manual

• A Builder who has carried out building work under

a residential building contract must provide a

written owner’s manual asa(p) after completion

• To the client & the relevant territorial authority

• But Reg. 9 only prescribes the info & documents

to be provided to the “client” (not the T.A.)

• Nothing is prescribed for providing to T.A.’s

• All insurance policies, guarantees & warranties,

and maintenance requirements

• Applies to all residential contracts, large or small

Insurance Policies

• A copy of every insurance policy that relates to the

building work and is still current on completion

• Of the 18, the “contract works” will have lapsed

• Ongoing policies like professional indemnity/E&O

might be relevant, but create an incentive to sue

• Do those policies allow the Builder to disclose?

• Why are the others, any of the Owner’s business?

• Were they thinking of some other type of policy?

• Not third party guarantees - they are covered by

the next section of the Owner’s manual

Guarantees & Warranties

• Builder must provide a copy of any guarantees or

warranties that apply to “materials or services” that

comprise the building work

• It’s highly likely that that includes manufacturers’

product warranties & installers’ service warranties

• Also “information” about whether the guarantees &

warranties are transferable, how to claim, and whether

they need to be signed and returned

• Implies that you must answer these questions rather

than simply letting the Owner work it out

• A major project would involve numerous warranties

Maintenance Requirements • Builder must provide information about the “processes and

materials” that must be used to maintain elements of the

building work, but only if:

– maintenance is required to meet the durability

requirements of the building code, or

– the validity of any applicable guarantee or warranty

could be affected by how and whether maintenance is

carried out

• In many cases, durability will depend on maintenance

• And in most cases, the guarantees & warranties will be

contingent on prudent maintenance being done

• Someone has to review them all & summarise that info

Durability Requirements • The durability requirements in the building code range

from 5 to 15 to 50 years

• Depends on whether the relevant building element

provides structural stability to the building, whether it is

difficult to access or replace, and whether failure of the

building element to comply with the building code would go

undetected during normal use or maintenance

• Builders will first have to identify every separate building

element in their work that realistically requires

maintenance in order to go the distance

• Then exercise their judgment as to which of the three

categories (5, 15 or 50) those building elements fall into

Guarantee & Warranty Requirements • Finally, the builder will have to detail the “processes” and

“materials” the owner should use to ensure each element

does go the required distance (5, 15 or 50 years)

• Builders will then have to analyse each guarantee and

product warranty to identify those which do require

maintenance to remain valid, and then describe what

maintenance is required under each document

• The enormity of the above tasks is beyond comprehension

• The only realistic way to do it is subscribe to a service that

has already compiled that information and can provide it

on-line in a user-friendly manner

Implied Warranties and Remedies • The Building Act has implied a range of warranties

into residential building contracts since 30/11/04

• Those are now in s.362I which is in Part 4A

• You can’t contract out of them, but they promise little

more than the law already provided

• The current Owner can enforce them against the

Builder, for up to 10 years after the work was done

• You can do that in the courts, in CCA adjudication, in

WHT adjudication, or in arbitration

• You can’t contract out of that right unless you are (or

should be) aware of a breach of the relevant warranty

Implied Warranties and Remedies

• They are sensible warranties but they lacked teeth

• Since 1 January 2015 they now have far more teeth

than the CGA, and you can’t contract out of them

• Owner may require Builder to remedy a breach of

warranty, if it can be remedied and isn’t “substantial”

• It appears the Builder has no right to repair

• If the Builder doesn’t repair, Builder must pay the cost

of repairs done by another builder, or the Owner can

cancel the contract if the project is still ongoing

• In either case the Owner can claim damages as well,

for most reasonably foreseeable losses

Implied Warranties and Remedies

• Where the breach can’t be remedied, or it is

“substantial”, Builder must pay compensation for any

reduction in value below the price paid or payable, or

the Owner can cancel the contract if the project is still

ongoing

• In either case the Owner can claim damages as well,

for most reasonably foreseeable losses

• It won’t be hard for the Owner to categorise the

breach as substantial

• There are some permitted defences in s.362S but the

Builder must prove that they apply

12 Months Defects Remedy

• There is a new 12 months defects liability remedy,

applying to residential contracts & work from 2015

• This effectively supersedes the defects liability

clauses in existing residential building contracts

• A fifth law holding builders accountable - overlaps

with the other four, all of which last for 10 years

• This one requires the assertion of a “defect” rather

than breach of contract, duty of care, warranty, etc

• The Builder must prove there is no defect or that

one of the permitted defences (s.362S) applies

12 Months Defects Remedy • Not certain whether those are the only defences

• There is now an MBIE Guide to Tolerances which

helps determine whether it is a defect or not

• If it is a defect, and it can be repaired, and no

defences apply, the current owner (within the 12

months) may require the Builder to repair the defect

• It appears the Builder has no right to repair

• It doesn’t matter if the defect is substantial or not

• In addition the Owner can claim damages, for most

reasonably foreseeable losses

• This warranty appears to apply to subcontractors also

On-sellers

• “On-sellers” are also caught by the implied warranties

and 12 months defects remedy

• They are not only the spec house builder, but also

someone who (as part of a business activity) arranges

for the house to be built or acquires it from a builder or

another person who arranged for its construction

• They must have done so for the purpose of on-selling

the household unit

• The agreement for sale & purchase is treated as if it

was a residential building contract

Commercial On-sellers

• “Commercial On-sellers” are those who actually

trade in spec houses as a business

• They can’t settle the sale, or allow the purchaser

into possession, before they have obtained a CCC

• There is a special form you can use to get out of

this requirement by prior agreement with the

purchaser

• But if you haven’t obtained a CCC and you

haven’t got the purchaser to sign that form, the

penalty is a fine of up to $200,000

The New Rights & Remedies in Action • Pre-contract insurance summaries are too difficult

& warranty summaries are also too speculative

• The owner’s manual on completion is even harder

• Obvious that many builders, owners are unaware

of the four documents that are now required

• General awareness of need for written contracts

• If you don’t use sophisticated contracts then what

you will have is a mix of express & implied terms

• No word yet of any spot fine or enforcement

• Not yet mentioned in any complaint to the BPB