Another NSW Strata Corporation Defect Claim is Out of Time

Here’s another sad story of strata corporation ultimately losing a significant part of its defect claim after 6 years of litigation in the NSW Supreme Court.

Strata Scheme 64970 is an eight storey building on the NSW Central Coast that was completed in 2001.

By early 2002 there were leaks from windows whenever it rained and the stell roof structure was rusting.   In 2005 the strata corporation started legal action against the builder Austruc Constructions and on 8 February 2008 the strata corporation also started action against the architect, Cyril Smith & Associates.

By the end of 2009 the strata corporation had obtained a judgment against Austruc Constructions for $1,250,000 (but it had become insolvent and gone into liquidation), a judgment against Cyril Smith & Associates for $170,000 and an order that Cyril Smith & Associates contribute $297,000 of the $1.25 million Austruc Constructions had to pay.

But, Cyril Smith & Associates appealed those orders arguing that the strata corporation’ claim against it was out of time because it was started more than 6 years after it suffered the loss in this case.

In simple terms the dispute in this case was whether in a building defect claim the loss is suffered when the strata corporation knows of the defect or when it properly investigates it and know who is responsible for it (and why)?  The date when it suffers the loss is the time when it’s right to sue arises and last for 6 years.

The NSW Court of Appeal looked at previous important cases and the what actually happened at Strata Scheme 64970 to decide that the strata corporation was  too late when it started action against Cyril Smith & Associates.

In doing so, the Court made the following important statements.

• The law as stated by the NSW Court of Appeal in Scarcella v Lettice [2000] and the High Court in Sutherland Shire Council v Heyman [1985] that a loss arises ‘when the defects become manifest or are otherwise discoverable” was correct.
• There is an important difference between the visible signs that indicate a defect and the cause of the defect which affects building defect cases.
• It’s also possible that sometimes a defect may become known before there is any physical damage (such as defective footing discovered by inspections but before cracks appear) and at other times the damage will occur before it is know that it is the result of the latent defect.
• In the second case the time when loss is suffered (in the legal sense) is when the link between the damage and the cause is known or could have been discovered.
• In this case one defect was the windows themselves as they were now watertight, (rather than their design, installation or inspection) so it was important to find out when that fact was known.  The other defect was the rusting roof steel so it was important to decide when that was also known.
• Once these things were know (regardless of whether or not the strata corporation knew who was responsible for them) time to start legal action began.
• The evidence was clear that during 2001 the building caretaker had noted and report rusting of the steel roof frame and that during later 2001, and by the latest on 6 February 2002, the building caretaker had noted and report water entry through the windows whenever it rained and that the windows themselves were defective.

So, the Court of Appeal decided that the relevant knowledge and the loss occurred more than 6 years before legal action against Cyril Smith & Associates was started. 

As a result, the Court overturned the judgment against it for $170,000 and the order that it contribute $297,000 of the $1.25 million Austruc Constructions had to pay.  Since the $170,000 had already been paid, it also ordered the strata corporation to repay it and made a costs order against it.

It’s a tough decision for this strata corporation since it clearly had significant defects, spent a lot of time and money running it’s cases, ended up with a judgment against a liquidated builder and has lost the benefit of the architect paying at least a third of that amount.  And, to make it worse in relation to the windows the strata corporation was only 2 days out of time.

But, the case is also a sobering message to other strata corporations about how time to take legal action can start when it becomes aware of leaks, rust and other defects (even through a caretaker) whether or not it knows exactly why those things are defective and who’s responsible.

I’m sure this case will be used by many defendants in defect claims to try to avoid legal liability and could also expose caretakers, managers and committee members who fail to report, advise and act in time to secondary liability for missing legal time limits.

The case is Cyril Smith & Associates Pty Limited v The Owners – Strata Plan No 64970 [2011] NSWCA 181 decided on 6 July 2011 if your want to read the decision for yourself.

Francesco …