Clarifying consumer protection measures

Simpson Grierson takes an in-depth look at the recently announced consumer protection measures and expands on builders’ new responsibilities

This article focuses on the significant changes introduced by the Building Amendment Act 2013 (Act), designed to strengthen the rights and remedies of consumers in relation to residential building work. As announced in MBIE’s article last month, these are due to come into force in January 2015. Simpson Grierson offers insight into the changes and what they mean for builders.

New consumer protection measures

From 1 January 2015, new regulations come into force, which will apply to all residential building work valued at $30,000 or more. These regulations focus on the relationship between principals (homeowners) and building contractors. They aim to increase consumer awareness and protection by:

• Requiring building contractors to disclose information about their qualifications and building history before entering into, and after completing work on, a residential building contract.
• Creating mandatory minimum requirements for building contracts (including a requirement that contracts over $30,000 be in writing).
• Imposing fines for not complying with the law and specifying remedies for breaching implied warranties.
• Introducing an automatic 12-month defect repair period.

Information disclosure

The building contractor will be obliged to give their client a checklist. This will be a generic, standard form document published by MBIE. It is intended to inform clients generally about what they should consider when entering into a contract. Details are still being finalised, but indications are that it will include:

• An explanation of the legal obligations of the client and the building contractor, eg that all building work must comply with the Building Act 2004 and what type of work requires a building consent.
• Advice about managing a building project and hiring competent building contractors.
• An outline of the requirement for contracts to be in writing and to contain certain information, such as start and completion dates, payment processes, dispute resolution processes and how variations are to be handled.
• Dispute resolution options.
• Sources for further advice and information.

The building contractor will also be required to disclose certain information about themselves to the client before entering into a residential building contract if the contact price is over $30,000, or if the client requests the information.

The information that must be disclosed will be specific to each building contractor and each project. The precise detail of what information must be disclosed is still being worked out and will be published as regulations (presumably before the end of this year). However, indications are that the disclosure requirements will include:

• Information about the legal status of the building contractor – is the ‘builder’ a company, a partnership or an individual?
• The dispute history of the building contractor.
• The skills, qualifications, and licensing status of the individuals who will be undertaking the work.
• If the building contractor is a company, what is the role and business history of the directors?

There will also be requirements to disclose information about what insurance policies the building contractor holds or intends to take out, and information about any guarantees or warranties the building contractor offers in relation to the particular project.

At the end of the project, the building contractor will be required to disclose further information about:

• The identity and contact details of the building contractor.
• Any guarantee or insurance the building contractor obtained for the building work.
• Any maintenance requirements for products involved in the building.

“It is important that building contractors take control of the contract formalities up front and produce clear, compliant written contracts

Minimum requirements for residential building contacts

As outlined in MBIE’s article last month, from 1 January 2015 residential building contracts over $30,000 will have to:

• Be in writing.
• Be dated.
• Comply with any other minimum requirements that the regulations prescribe.

The regulations are likely to prescribe that contracts must include certain content, categories or specific information, categories or types of terms or specific terms. These terms are likely to include:

• The names and contact details of the parties.
• The process to be followed if a dispute occurs.
• The process for varying the contract scope.
• The timeframe for performing the contract.
• The payment process.

Fines

The onus is heavily on the building contractor to ensure these new requirements are met. For residential projects valued at over $30,000, the building contractor can face fines of up to $2,000 for:

• Failing to disclose the required information.
• Not having a written contract.
• Having a contract that otherwise does not comply with the minimum requirements for contracts (for example by not including specific terms specified in the regulations).
• If a building contractor knowingly makes a statement or omission that is false or misleading in a material way, they could face a fine of up to $20,000.

It is important, therefore, that building contractors take control of the contract formalities up front and produce clear, compliant written contracts. This may be completely new territory for many builders, who are used to a more informal approach!

Implied warranties and defects*

There are already certain warranties implied into every contract for construction of a residential building. Those warranties state that all residential building work must:

• Be carried out in a proper and competent manner, with reasonable skill and care.
• Comply with plans, specifications, the building consent and all relevant laws.
• Be undertaken using materials that are fit for purpose and new (unless the parties agree otherwise).

However, remedies for breaches of these implied warranties are new, and include:

• The homeowner can require the building contractor to remedy the breach.
• If the building contractor refuses to remedy the breach or does not remedy within a reasonable time (or at all), then the homeowner has the option of having the breach remedied by someone else and recovering reasonable costs and damages from the building contractor, or cancelling the contract.
• If the breach (ie the defect) cannot be rectified, or if the breach is substantial, then the homeowner has the option of seeking compensation from the building contractor (for the reduction in value of the building work) or cancelling the contract.

*NOTE: Implied warranties and defect repair requirements apply to all residential building contracts, whether they’re over $30,000 or not.

Remedying defects

Building contractors will also be required to remedy any defects that they are notified of within one year of the residential building work being completed. This requirement applies unless the building contractor can prove that the defect was caused by:

• Something beyond human control.
• Someone for whom the building contractor was not responsible.
• Failure to carry out normal maintenance.
• Failure to carry out repairs as soon as practicable after the defect became apparent.

So, as soon as an issue arises, it’s important that the building contractor investigates the problem thoroughly. The onus is on the building contractor to either fix the problem or prove they are not responsible for creating it. Proving responsibility after the fact is a notoriously difficult (and often expensive) task.

Conclusion

From 1 January 2015, consumers in a residential building project will receive greater protection by law, through increased awareness about their building contractors and building processes generally, and through the availability of new remedies for when defects occur.

Building contractors, who carry out residential building work valued at $30,000 or more, will be required by law to produce formal written contracts and to disclose detailed information about them and their businesses, and can face substantial fines for not complying with the new regime.