LEAKY BUILDINGS
How long is a ‘long stop’?
Janine Stewart and Laura Tilbrook look at the effects of the  Building Act’s long-stop provision on contractual claims

Owners once dreamed of building their own home, whether it be that villa by the beach or bungalow overlooking the city. However, due to the leaky building epidemic, never mind the heavy statutory framework which now governs construction, building the dream home (and even carrying out building work on your existing home) can be more trouble than it’s worth. 

A number of owners who built or renovated their homes, and then sold them under ADLS standard sale and purchase agreements (which contained pro forma warranties confirming any such work complied with the Building Act 2004), have been named as primary defendants in defective building claims. Normally, these owners are able to join parties responsible for the building work as third parties to the proceeding. However, Mr Gedye found himself named as a key defendant in a leaky building claim with no ability to join those responsible for the works. Due to the long-stop provision of the Building Act, there was nothing he could do about it.  

The long stop
It is well-established that the long-stop provision in the Building Act (long stop) provides an absolute bar against claims of negligent building work 10 years after the work was completed.

The long stop is set out in section 393(2) of the Building Act (identical in effect to its predecessor, section 91(2) of the Building Act 1991), which provides that “no relief may be granted in respect of civil proceedings relating to building work if those proceedings are brought against a person after 10 years or more from the date of the act or omission on which the proceedings are based”.

This long stop does not overrule the limitation period imposed by section 4 of the Limitation Act 1950 (1950 Act) or under the new Limitation Act 2010 (as the new Act only applies to acts or omissions occurring after 1 January 2011, this article is based on the 1950 Act).

The six-year limitation period has always been a concern in construction claims because often the defect giving rise to the claim is latent and may not be discovered until after the six-year period has expired. In order to overcome this, New Zealand Courts imposed a ‘reasonable discoverability’ test, such that the limitation period for negligent building claims is six years from the date of actual discovery of the damage (otherwise known as the Hamlin test as it was adopted in Invercargill City Council v Hamlin [1994] 3 NZLR 513 (CA); [1996] 1 NZLR 513 (PC)). The long stop curtails the Hamlin test by providing an absolute limitation on claims after 10 years.

The Hamlin test does not apply to contract claims, as the six-year limitation period commences from the date of the breach – not the date of damage (as in negligence claims). In general, limitation periods for breach of a construction contract will commence from the date of practical completion of the work. Accordingly, any claim in contract becomes time-barred six years later and the 10-year long stop is normally irrelevant. 

However, Gedye v South [2010] 3 NZLR 271 (CA) demonstrates the difficulties the long stop can cause in contract claims. This decision confirms that the long stop commences from the date of breach of the contract, even if this is more than 10 years after the construction work has been completed. Accordingly, if a warranty regarding building work is given 15 years after the work is completed, the breach occurs on the date the warranty is signed, and a party can still sue on the warranty (provided he does so within six years from the date of the warranty). However, the party that gave the warranty will be unable to join the architect, builder, Council, or any other liable parties, as the long stop will have expired in respect of their breaches.

It does not appear that Parliament considered the application of the long stop to contractual claims of this type. The policy focus of the section 91(2) provision was primarily on balancing competing interests of homeowners and those involved in the construction industry, in light of the Hamlin test (which led to litigation based on work undertaken many years earlier).

Gedye v South
In 1997, Gedye arranged for work (which required a building consent under the Building Act) to be carried out on his house. In 2003, Gedye sold his house to the South Family Trust pursuant to an ADLS standard form agreement (seventh edition), which included a warranty that all obligations imposed under the Building Act in respect of the 1997 work had been fully complied with. It later transpired that the work was defective, and in 2008, the South Family Trust commenced proceedings against Gedye, 11 years after the original work was completed.

Gedye was unable to join the parties involved in the original work as the work had been carried out 11 years prior to the commencement of proceedings and he was time-barred by virtue of the long stop (other than in relation to the Council, due to its late issuing of the Code Compliance Certificate).

Gedye argued that the plaintiffs were also time barred from pursuing him on the grounds that Parliament had intended the long stop to be an absolute bar against proceedings where the building work had been completed more than 10 years earlier. He submitted that this upheld the legislative purpose of avoiding potential injustice by preventing the litigation of stale and historic claims.

However, the Court of Appeal and Supreme Court found against Gedye on the basis that, in the context of the long-stop provision, the ‘act or omission’ referred to the breach of warranty rather than the building work. This occurred on the completion of the sale and purchase agreement in 2003, and time did not start running under the long stop until that date.

In reaching this conclusion, the Court of Appeal considered two different lines of authority – Hamilton City Council v Rogers (High Court, Hamilton A92/97, 23 April 1998, Justice Robertson) and Klinac v Lehmann (2002) 4 NZ Conv C 193,547, but agreed with the approach and outcome in Klinac. The Supreme Court confirmed this view as being “undoubtedly correct” and refused leave to appeal ([2010] NZSC 97).

Rogers
In this case, the Council built a house on some infill property in the 1950s. The Council subsequently sold the property to Mr and Mrs Rogers in 1986. The Rogers discovered that the house had been damaged due to some subsistence. They had to rebuild the foundations at a cost of $47,000 and sued the Council to recover these costs and for general damages.

The High Court considered that the commencement of the long stop should be linked to the factual matter – ie the building work in the 1950s, rather than to when the breach of contract occurred, which is the traditional commencement point under the 1950 Act. This was on the basis that Parliament had expressly introduced a different measure by implementing the long stop, and sought to achieve certainty and finality in relation to defective building disputes.

Klinac
On the other hand, in Klinac, Justice Glazebrook rejected the conclusion reached in Rogers and found instead that the relevant act or omission for the purposes of the long stop is the actual breach of contract.

Mr Klinac had undertaken some building work on his property in the 1970s and 1980s. In 1998, he entered into an agreement to sell his property to Mr Lehmann. However, Lehmann did not pay the full settlement sum and Klinac sought to recover the outstanding amount of $118,000. In his defence and counterclaim, Lehmann alleged that Klinac had breached a term of the contract which provided that all building work on the property had been completed to an acceptable standard, in accordance with the relevant building permits and the Building Act.

Justice Glazebrook held in favour of Lehmann, on the basis that the building work itself was not the relevant ‘act or omission’, stating at [50] that:

“[W]here the action is one based on breach of contract … there is a further act much more closely connected to the cause of action – the entry into the contract and the breach of the contractual term... [T]he entry into the agreement containing the term it is alleged has been breached determines the relevance of other factors, including the preceding building work. The faulty building work is relevant solely because it goes to prove that a representation was a misrepresentation, or that a term of the contract was breached. It is not the act upon which the proceeding is based (unlike in actions for negligence).”

Her Honour also found support for this position on a broader, policy-based view, in that if the long stop ran from the completion of the building work, then a warranty signed 10 years after the building work would be worthless from the moment it was made. There would thus be no limitation period at all, which Justice Glazebrook considered was clearly not Parliament’s intention.

What does this mean for people who build or renovate their homes?

While the applicable warranty has since been removed from the ADLS standard sale and purchase agreement, Gedye confirms that parties who have undertaken building work, and later provided a warranty in respect of it, may be liable for any defects that are discovered – notwithstanding that they cannot recover these costs against the parties who are ultimately responsible for the defects. 

Janine Stewart is a senior associate, and Laura Tilbrook, a solicitor, with Minter Ellison Rudd Watts. Janine can be contacted on 09 353 9922 and janine.stewart@minterellison.co.nz.

NZLawyer magazine, issue 153, 11 February 2011