Australia: Can A Director Of A Building Company Be Personally Liable For Misleading Or Deceptive Conduct By Failing To Obtain Domestic Building Insurance?

Domestic building insurance covers building owners for costs incurred in rectifying structural defects for up to six years and non-structural defects for up to two years to a maximum of $300,000 in the event a builder dies, disappears or becomes insolvent. This form of insurance must be provided by a builder when the cost of building work is more than $16,000 (including labour and material costs).¹

The establishment of this obligation is indeed a cornerstone of the Domestic Building Contracts Act 1995 (Vic)², and is further entrenched in the builder-owner relationship by the requirement that a builder must not enter into a major domestic building contract unless the contract sets out among other things the details of the required insurance³.

But what happens when a builder fails to obtain domestic building insurance, even though the contract purportedly sets out the details of the intended cover? Section 18(1) Australian Consumer Law provides "a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive". Can a building owner maintain the director of the builder has engaged in misleading or deceptive conduct in such circumstances?

This issue arose in a decision recently handed down by the Victorian Civil and Administrative Tribunal.⁴ The dispute consisted of a series of claims brought by the applicants/owners against a number of individuals and companies allegedly involved in the construction of three townhouses in Mitcham.⁵ Briefly, the relevant facts were:

1. In 2012, the applicants engaged the first builder to construct three townhouses.
2. By 2015, a dispute had arisen between the applicants and the first builder.
3. The applicants subsequently entered into a second building contract with a second builder to complete the construction of the units.
4. The first builder went into liquidation on 23 December 2015, and the second builder was deregistered on 14 August 2016. Despite this, building works continued until about May 2017, at which time, according to the applicants, works were abandoned uncompleted.
5. The applicants were indemnified under the domestic building insurance policy with the first builder, but the insurer denied indemnity for the works carried out by the second builder on the grounds that no policy had been issued for those works.
6. The applicants alleged among other things that the director of the second builder made a representation in the building contract that there was or would be domestic building warranty insurance in place with QBE Insurance (Australia) Ltd, that no such policy in fact existed, and that the director had therefore engaged in misleading or deceptive conduct, as a result of which the applicants had suffered loss and damage.

The applicants' claim against the director failed. The Tribunal observed that the applicants needed to do more in order to prove the necessary elements of the claim.⁶

Firstly, the Tribunal was not satisfied the representation had been made by the director personally. The alleged representation was in writing in the building contract, but the director was not a party to the contract, and the applicants led no evidence that the director had made the representation in his personal capacity. The director did not send the building contract to the applicants, and was not present at the time it was signed.⁷

Secondly, even if there was a representation in the building contract, it was representation as to a future matter i..e., that the second builder would obtain an insurance policy. In order for a representation as to a future matter to be misleading, it must be shown that the representor did not have reasonable grounds for making it.⁸ The applicants had led no evidence that at the time the representation was made, there was no reasonable basis for a belief that it could not be carried out.⁹

Thirdly, the applicants had not led any evidence to establish that they relied on the representations when entering into the building contract (a necessary element of a claim for misleading or deceptive conduct). It was only after entering into the contract that they asked for a copy of the insurance policy, and they first noticed there was no insurance only after the second builder had stopped work, some two years after entering into the contract.¹⁰

Fourthly, the applicants failed to establish what loss and damage flowed from being misled or deceived as a result of the representation. Rather than such evidence being non-existent, the manner in which the applicants had prepared their evidence made it impossible for the Tribunal to determine which amounts related to defects caused by the second builder, whether the defects were in fact breaches of the statutory warranties,¹¹ whether those works were part of the scope of works under the second building contract, whether the amounts claimed were reasonable, and whether those items would have been covered by any insurance policy.¹²

Finally, it emerged during the trial that at least some of the defects had already been the subject of a settlement.¹³

Conclusion

It is trite to say that insurance plays a fundamental role in the potential risks undertaken by a building owner in the context of domestic building works. To reiterate, this has been enshrined in the legislation. ¹⁴ And although the director successfully defended the claim made against him in Sarab, builders should be cautious about taking reassurance from this decision if they happen to find themselves in similar circumstances. The Building Act provides for significant penalties for failing to hold relevant insurance.¹⁵ Further, the Tribunal was required to consider the various elements of a claim for misleading or deceptive conduct, and decided on the facts of the case that the claim was not open to the applicants. But that is not to say that a different set of circumstances might arise in which an owner could satisfy those elements with appropriate evidence, and leave a director exposed to the risk of personal liability, in addition to any penalties that might apply.

Footnotes

¹ Section 135 Building Act 1993 (Vic) empowers the Minister to require various building practitioners and owner builders to purchase particular types of insurance. The requirement of domestic building insurance is sourced from the Order published in Special Government Gazette S98 on 23 May 2003, and which took effect on 1 July 2003, as varied by the Order published in Government Gazette G22 on 29 May 2014, and which came into effect on 1 July 2014.

² See sections 1(c) and 4(c).

³ Section 31(l) Domestic Building Contracts Act 1995 (Vic).

⁴ Sarab v. M Property Group Victoria Pty Ltd 2022 VCAT 817 (20 July 2022) (Sarab)

⁵ Sarab paragraph 1.

⁶ Sarab paragraph 27.

⁷ Sarab paragraph 29.

⁸ Section 4 Australian Consumer Law.

⁹ Sarab paragraph 32.

¹⁰ Sarab paragraph 33.

¹¹ Section 8 Domestic Building Contracts Act 1995 (Vic).

¹² Sarab paragraph 37.

¹³ Sarab paragraph 38.

¹⁴ See footnote 2 above.

¹⁵ See section 136(1) and (2) and section 137.

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