Defects visible to the ‘untrained eye’ can constitute constructive knowledge
Meier v Balbin (Domestic Building)  VCAT 57, 22 January 2013, Member M. Farrelly
This is the second case note of two cases in which subsequent owners of a home have brought proceedings in respect of defects which are said to have arisen after purchase of the home. In determining whether the owners had suffered loss, the Tribunal considered whether the owners had constructive knowledge of ‘reasonably observable’ defects, also introducing the concept of the ‘untrained eye’.
In 2005 the respondents purchased a house in Caulfield North and over the ensuing 2 years they demolished the house and built a large double storey home as owner-builders. The occupancy permit was issued in 2007. In 2008 the respondents sold the home to the applicants. The applicants inspected the home twice in early 2008 and purchased the house in July 2008 for around $3million, with settlement to occur in December 2008.
The home was sold subject to the owner-builder warranties in s137C of the Building Act 1993 (Vic). The respondents obtained and included in the s32 vendor’s statement a report on the building works, as required by s137B of the Building Act. The report, which was authored by Archicentre, identified ‘nil’ defects in the building works.
The owners claimed damages against the respondents in the amount of $334,000, which they say was the cost to rectify various defects in the house. The respondents defended the action, arguing (amongst other things) that because the owners inspected the property prior to the purchase, the owners knew what they were buying and therefore cannot claim compensation in respect of alleged defective or poor quality works which were, or should have been, apparent to them before the purchase.
Member Farrelly referred to his decision in Bonarrigo v DSF Pty Ltd trading as LaRosa Tiling Company (Domestic Building)  VCAT 1404 and stated that:
‘It is reasonable, in my view, to presume that a purchaser of a home makes allowance for known or patent defects when negotiating the purchase price and, as such, the purchaser can have no “loss” arising from a breach of the warranties in respect of such defects. By ‘patent’ I mean a defect which ought reasonably have been observable on inspection and the significance of which, in terms of a likely need for rectifications, ought reasonably have been appreciated.‘
Member Farrelly, throughout his reasoning, relied on the concept of whether the defects were ‘reasonably observable’ to the ‘untrained eye’ to determine if they were, or were not, patent defects. Examples of defects that were held to be reasonably observable include patchy render, poorly closing and opening windows, poor quality cabinetry and inadequate sealing around pipe penetrations in the ensuite cabinetry.
Examples of defects that were not considered to be reasonably observable to the untrained eye include the proximity between cladding and flashing, lack of articulation, roof plumbing defects, lack of subfloor ventilation, movement in the parquetry floor noticeable ‘only upon very close inspection’, restricted access to an air conditioning vent and wrong nails used in the decking.
This decision is important because Member Farrelly disallowed claims with respect to defects which had not been observed by the purchasers prior to purchase or by the expert retained by the vendors and whose report was included in the contract of sale. The Tribunal introduced the notion of the ‘untrained eye’ to defects which were in existence before a house was purchased by a subsequent owner. That is, if the ‘untrained eye’ ought to have seen the defect, then it is patent and no loss has been suffered in respect of it.
There was no reference by the Tribunal to the New South Wales Court of Appeal decision of Allianz v Waterbrook  NSWCA 224. In Allianz, the Court of Appeal declared void a clause in a policy of domestic building insurance which purported to exclude liability for breaches of statutory warranties where defects in the work would have been reasonably visible at the time any successor in title acquired the building.
Ipp JA, with whom Hodgson JA agreed, stated at  that a successor in title who acquired a building in full knowledge of its defects suffers no loss from the existence of those defects, but a person who was not aware of the extent of the expenditure required to remedy the defect might be able to prove that he had suffered loss. Giles JA went further and held at  that there was ‘no sufficient reason why the person doing the residential building work should be relieved from liability if the defect…was reasonably visible at the time of acquisition’.
In the writer’s view, the correctness of Meier in this respect must be doubted. It is difficult to justify denying a remedy to a purchaser for defects which he or she did not see and which were not brought to that person’s attention in an expert’s report supplied by the vendor. A vendor may be able to put the matter beyond doubt by inserting a clause in the sale contract to prohibit the purchaser from taking proceedings for breaches of the statutory warranties which were known or ought to have been known to the purchaser at the time of signing the contract, a course which appears to be permitted by sub-section 137C(3) of the Building Act 1993.
Andrew Downie – CommBar Profile