Introduction

Systemic defects in strata buildings can be a hidden yet costly issue for owners corporations and strata managers. These defects, often stemming from fundamental flaws in construction, can lead to widespread damage and significant financial burdens. Understanding and identifying these issues early is crucial for maintaining the safety, value, and livability of strata properties. In this article, we explore the legal intricacies of proving systemic defects, using the recent case of The Owners v SPS Building Contractors [2022] NSWSC 1464, as a key example, and provide insights on how to navigate these challenges effectively in Australia.

What are Systemic Defects in Strata Buildings?

Systemic defects in strata buildings refer to flaws that occur consistently throughout a structure, indicating a fundamental issue with the construction process or materials used. These defects are widespread and consistent, suggesting that the work was uniformly done incorrectly. The concept is crucial for identifying and addressing quality issues in buildings where repetitive construction techniques are employed.

Considerations in Identifying Systemic Defects

• Cause Analysis: It is essential to determine why a systemic defect occurred. This could be due to incorrect construction methodology, poor-quality materials, or inadequate supervision during construction.
• Extent of Defect: Understanding the full scope of a systemic defect involves assessing whether it affects all instances, such as every bathroom in a building, and why some instances show damage while others do not.
• Inspection Scope: Not all instances of a defect can be inspected due to time or cost constraints. A representative sample may need to be examined to verify if the defect is systemic or recurring.
• Hidden Defects: Some defects may not be immediately visible, especially if they are behind walls or in ceiling spaces. For example, issues like improperly installed fire collars can go unnoticed without thorough inspection or review of as-built construction drawings.
• Variance in Defective Work: In cases of recurring defects, it is crucial to measure the variance between compliant and defective work. This helps in understanding the extent and potential impact of the defects.
• Scope of Rectification: The approach to rectifying systemic defects may vary depending on the defect’s location and the specific conditions. For instance, a sliding door defect might require different solutions based on exposure to elements like wind-driven rain.

Systemic Defects vs Recurring Defects

	Systemic Defects	Recurring Defects
What is it?	Consistent flaws identified throughout multiple areas of a building, with no instances of the work being performed correctly. Indicates a pervasive issue, such as incorrect construction methods or unsuitable materials.	Similar to systemic defects but with variability in the construction quality, indicating instances where the work has been done correctly.
Example	Widespread waterproofing failures due to improper materials or techniques across an entire building.	Some bathrooms in a building exhibit waterproofing issues while others do not, indicating variability in workmanship or material use.

Legal Remedies for Systemic Building Defects

Systemic building defects in strata properties can have significant legal implications and remedies. Under the Home Building Act 1989 (NSW), statutory warranties provide protections and avenues for redress for building owners and occupants. The key legal remedies include:

Damages for Breaches of Statutory Warranties

Under Section 18B of the Home Building Act 1989, several warranties are implied in every contract for residential building work. These warranties ensure that:

• Due Care and Skill: The work is performed with due care and skill, following the contract’s plans and specifications.
• Quality of Materials: All materials provided are suitable for their intended purpose and, unless otherwise stated, are new.
• Compliance with Laws: The work complies with applicable laws and regulations.
• Timeliness: The work is completed diligently within the stipulated time or, if no time is specified, within a reasonable timeframe.
• Fit for Occupation: For work involving the construction, alteration, or repair of a dwelling, the resulting work makes the dwelling reasonably fit for occupation.

Extension of Warranties to Successors in Title

Section 18D of the Home Building Act extends the benefit of these statutory warranties to successors in title. This means that new owners of the property can enforce these warranties as if they were the original parties to the contract. Specifically, an Owners Corporation can sue developers and builders for breaches of these warranties concerning common property in strata schemes.

Time Limit for Claims

Under section 18E(1) of the Home Building Act, any claim for breach of a statutory warranty must be made within a specific period:

• Six Years: For breaches resulting in a major defect in residential building work.
• Two Years: For other breaches.

The warranty period begins from the date the construction work is completed. It’s crucial for Owners Corporations to act promptly to ensure that any proceedings are initiated within these time frames.

These statutory warranties provide essential protections and remedies for property owners, allowing them to seek compensation and rectification for defective work that does not meet legal and contractual standards.

Case Study: The Owners v SPS Building Contractors 

In the recent case of The Owners – Strata Plan 99960 v SPS Building Contractors Pty Ltd [2022] NSWSC 1464, the owners corporation pursued legal action against the builder to seek damages for rectifying defects throughout the complex, built in 2018 and 2019. The dispute centered around systemic defects, and the judgement deals with key legal principles related to evidentiary requirements for proving systemic defects.

Factual Background

A strata complex with 45 townhouses in Tweed Heads South, built around 2018 and 2019, was found to have defects. In 2021, the owners corporation of the complex filed a lawsuit against the builder, seeking damages to cover the costs of fixing these defects. They claimed that several of these issues were systemic, affecting multiple townhouses. One specific defect involved waterproofing problems at the outer edge of balconies above garage doors in many townhouses.

The systemic defect, referred to as SD2, included three specific issues:

1. Defects in the waterproofing of the rear first-floor balconies.
2. Defects in the waterproofing at the inner edge of the front first-floor balconies, beneath the balcony doors.
3. Defects in the waterproofing detail at the outer edge of the front first-floor balconies, which caused damage to structural LVL beams.

Point of Contention between the Parties

Experts from both parties agreed on the existence of the first two defects in all 26 townhouses that had first-floor balconies. However, the third defect was confirmed only in two townhouses and was disputed by the builder, SPS, for the remaining 24 townhouses.

The experts also agreed that the beam spanning the outer edge of the balconies in two townhouses suffered moisture damage due to the same waterproofing defect. However, the owners corporation’s expert did not inspect the other townhouses or provide evidence that the same defects existed in them. The builder denied that these defects were present in the other townhouses, arguing that the owners corporation had not proven its case.

The main disagreement between the parties was whether the defect found in two townhouses could be assumed to exist in all 26 townhouses of Types A and B. SPS agreed that if the defect was proven in all 26 townhouses, then the same rectification work required for Townhouses 25 and 27 should be carried out in all of them. This was because, despite no visible damage in the other 24 townhouses, the risk of damage was significant enough to justify the repairs. However, SPS disputed that the presence of the defect in two townhouses could be used to infer that the defect existed in all 26.

Proving the Existence of Systemic Defects in Your Strata: Key Legal Principles Discussed in The Owners v SPS Building Contractors

Legal Principle #1: Burden of Proving Systemic Defects Lies with the Owners Corporation

SPS referred to the decision in The Owners – Strata Plan No 62930 v Kell & Rigby Holdings Pty Ltd. One of the defects at issue in that case was the absence of water-stops in bathrooms in a block of fourteen units. The only conclusive way to determine the presence or absence of water-stops in a particular location was to remove a number of floor tiles. This was done in the bathrooms of three units, and in each case, there were no visible water-stops in the area in which the tiles were removed. The court noted that the burden of proof lay on the owners corporation and that it had chosen to carry out limited destructive testing in three bathrooms and that there was no apparent reason why it could not have done so in all of the units. This makes it clear that the owners corporation is responsible for proving systemic defects in order to claim any damages from the builders. 

Legal Principle #2: Systemic Defects Cannot be Assumed “Due to Similar Construction Details Being Present” in Uninspected Units

In his report, one of the experts involved in the case recommended that testing should be conducted on all townhouses with specific balcony features, suggesting that similar defects could be present in other areas with similar construction details. This assumption was based on findings in a few inspected units, where defects were identified. The expert’s opinion was that defects found in a few units could imply similar issues throughout all units, given the consistent construction methods.

Rejecting this assumption, the court pointed out that this line of reasoning depends on the assumption that similar construction details are present across all units. The specific cause of the defects, such as waterproofing issues, was not determined—whether it was a design flaw, workmanship error, or another factor. Without clear evidence explaining the cause of the defects in the inspected units, it is not sufficient to conclude that the same issues exist in all uninspected units. The court focused on the requirement of concrete evidence, rather than assumptions based on limited inspections, to support claims of widespread defects.

Legal Principle #3: Expert Evidence is Critical in Determining the Extent and Cause of Damage

The owners corporation claimed that a front first-floor balcony in a third townhouse showed signs of moisture penetration affecting the LVL beam at its outer edge. They referred to several photographs, attached to the report of one of the experts, which were purported to indicate high moisture levels in the LVL beam under the front first-floor balcony of this townhouse. However, during submissions, it became clear that these photographs could not pertain to the said townhouse, as the layout depicted did not match the plans for that particular unit. Furthermore, the expert concerned was not questioned about these photographs.

Both the experts provided detailed reports, documenting their findings and observations concerning the townhouses in the development. They reviewed each other’s work and contributed to a comprehensive joint report, examining the defects in all 45 townhouses. Neither expert identified any damage to the LVL beam at the outer edge of the front first-floor balcony of the discussed townhouse, nor any other townhouse, except for those identified in Townhouses 25 and 27.

Given the extensive expert analysis related to SD2, and the absence of expert opinion supporting the notion that the photographs indicated another instance of this defect, the court stated that there is insufficient basis to conclude that an additional instance of the SD2 LVL defect exists, based on these unverified photographs. Moreover, without expert testimony explaining what conclusions could be drawn from the photographs, the court found no evidence regarding the cause of any potential water penetration or damage to the LVL beams, or whether such causes are consistent with those observed in Townhouses 25 and 27. This shows the evidentiary value of expert testimonies and reports in cases concerning systemic defects.

Legal Principle #4: Establishing Defect is Necessary to Establish Breach of Section 18B

The owners corporation argued that it was reasonable to rectify all LVL beams at the outer edges of the front first-floor balconies, due to the risk that structural failure of these beams could have serious consequences. It was submitted that if a defect is identified that presents a real risk of catastrophic failure, the existence of this risk becomes an important factor in assessing the reasonableness of proposed rectification works. This principle is supported by legal precedents, such as in Kirkby v Coote and Owners SP 92450 v JKN Para 1 Pty Ltd, where the potential for serious harm influenced decisions on the necessity and extent of repairs.

SPS agreed that if it is established, on the balance of probabilities, that a defect exists in the LVL beams at the outer edge of all front first-floor balconies, then it would be reasonable to carry out rectification work on all these balconies, similar to what was agreed for Townhouses 25 and 27. However, SPS argued that such a defect had not been proven for 24 of the 26 townhouses.

On this issue, the court stated that if no defect has been established, then no breach of Section 18B has been established. Before considering the measure of damages or the reasonableness of proposed rectification work, it is necessary first to establish a breach. Damages cannot be awarded based solely on a “risk” of a breach that might lead to damage if it were to occur.

In this case, a defect related to waterproofing at the outer edge of the front first-floor balconies has been established for Townhouses 25 and 27. However, no such defect has been proven for any other townhouse. Thus, the burden of proof requiring that a defect must be demonstrated before determining a breach and considering any damages, had not been fulfilled. 

Conclusion: Legal Implications of The Owners v SPS Building Contractors

Systemic defects in strata buildings present a significant challenge for owners corporations, requiring thorough investigation and legal action to address. The case of The Owners v SPS Building Contractors highlights the importance of concrete evidence, expert testimony, and a clear understanding of legal obligations in managing such defects. For strata managers and owners corporations, it is vital to seek expert advice from a strata lawyer to ensure the safety and integrity of their properties. If your strata property is facing similar issues, let’s talk!