Assessing the Period of Construction-Related Risk

Assessing the Period of Construction-Related Risk

Claims against building professionals relating to building and construction work are among the most costly proceedings to litigate. For insurers evaluating risk, knowing how long a building professional or company may remain “exposed” to litigation is essential.

Anticipating unknown defects poses challenges when assessing risk. In Australia, this risk is compounded by the lack of a national standard set of limitations periods.

Limitations on commencing building actions

Some jurisdictions have, in addition to imposing standard time limits following the accrual of an action, further limited claimant’s rights to commence actions. These parameters significantly affect the potential exposure of insurers. Below is a situational overview of each Australian state and territory.

Time limits for building actions are governed by 3 factors:

  1. State-based Limitation Acts
  2. Date of accrual of action
  3. State-specific limitations on building actions

Limitations Acts

Each jurisdiction provides specific limitation periods.  For the Northern Territory it is three years from the accrual of actions in tort or contract, and six years elsewhere in Australia.

Date of accrual of action

The basic common law position is that the right to take action accrues when either the defect in the building is actually discovered or if it is a latent defect, which is not apparent, when the defect becomes manifest (in the sense of becoming discoverable by reasonable diligence – Pullen and Anor v Gutteridge[1] ).

Where there are no statutory limits on by which construction proceedings have to be commenced by, or any deeming of when accrual of the right to take action arises, claims could be bought effectively at any time following discovery of a latent defect, as long as the action commences within the general limitation act limits for each jurisdiction. If 15 years post-construction a latent defect is discovered, action in regard to such can be commenced within six years (three in Northern Territory) of that discovery.

Tasmania and Northern Territory have provisions that deem when the right to take action accrues.  Each is different; however, effectively they relate to either date of issue of an occupancy permit, certificate of final inspection or building work completion. Neither jurisdiction has the deeming of the accrual of rights been judicially considered.  The Victorian position has now been considered, and we expect that decision will be followed in these jurisdictions.

In Brirek Industries v McKenzie Group Consulting[2], the Victorian Court of Appeal determined that section 134 effectively put a 10-year limit from the issue of an occupancy permit on a party’s right to commence a building action. This  is not limited by their Limitation Act

Section 134 says: “Despite anything to the contrary in the Limitation of Actions Act 1958 or in any other Act or law, a building action cannot be brought more than 10 years after the date of issue of the occupancy permit in respect of the building work (whether or not the occupancy permit is subsequently cancelled or varied) or, if an occupancy permit is not issued, the date of issue under Part 4 of the certificate of final inspection of the building work.

This decision also impacts upon the position in Tasmania, Northern Territory and Australian Capital Territory. Tasmania and Northern Territory have similar 10-year limits.  As a result in our view, the effective time in which to take action is 10 years, in these Jurisdictions. Essentially the effective time limit for building actions is 10 years in Tasmania, Australia Capital Territory and unlimited/six years from common law accrual elsewhere.

Common law across Australia

Limitation Act Date of accrual Building Act Comments
6 years Deemed at issuing of occupancy permit/completion of works 10 years post issuing of occupancy permit or first occupation or 2 years post building permit or date work completed if occupied without a permit.
6 years Common law 10 years post issuing of an occupancy permit, or certificate of final inspection Does the 10 years limit apply if no occupancy permit or certificate of final inspection has been issued.  It is not clear if this leaves open the right to accrue later.
6 years Common Law No specific limitations
6 years Common Law No specific limitations
Western Australia
6 years Common Law No specific limitations
3 years Accrual deemed at issuing or occupation permit or first occupation 10 years
6 years Common Law 10 years post Completion certificate; last inspection; or first occupancy Section 42 Building Act 2004, makes it clear that if limitation act limits to less than 10 years lower limit applies.
6 years Common Law No specific limitations

In considering rates for cover, the jurisdiction in which the insured operates can have a significant impact on your exposure profile.

[1] Pullen and Anor v Gutteridge Haskins and Davey Pty Ltd [1993] VicRp 4; [1993] 1 VR 27 (19 June 1992)

[2] Brirek Industries Pty Ltd v McKenzie Group Consulting (Vic) Pty Ltd [2014] VSCA 165