Brett on Builders Guarantees/Warranties
In answer to a question on our B. Rhodes Builders Facebook page from Peter on builders guarantees.
Question: Hi Brett - one building company we asked said they wouldn't normally guarantee work of around two and a half thousand dollars as they said the guarantee structures applied to bigger jobs (I think they said $30 000). Does that sound right?
This is a really great in-depth question and one that requires an answer to be tackled from a few different angles:
- What guarantees usually cover
- The Consumer Guarantees Act
- General rules about contracts
- Importance of the contract
Please note this is my view and should not be taken as legal advice.
The key outtake from the information below is that relationships are very important. Don’t get me wrong, the paperwork is still important, as this will ensure all parties are on the same page. But if you are relying solely on a piece of paper to protect you, you may find it is not worth the paper it is written on. However, if you have a good relationship with your builder they will usually stand behind their workmanship.
So in answer to your question about guarantees, you'll find from the information below you are actually covered by Consumers Guarantees Act and a good contract. So you don't need to stress the written guarantee (note this will cost you additional anyway).
(1) WHAT GUARANTEES USUALLY COVER
A look at what builders' guarantees cover and what they exclude.
Both the Certified Builders' Association of NZ (CBANZ) and the Registered Master Builders' Federation (RMBF) offer guarantees and a number of other builders and building companies offer their own guarantees.
It is most important that you ask the builder or company if they offer a guarantee. Find out what it covers and if you have to pay anything or fill out any forms to activate the guarantee. Don’t just assume that you are automatically covered.
Also find out what sort of contracts the guarantees cover – some may only cover work done under a full contract and not under a labour-only contract.
Guarantees generally cover:
- A contribution to the costs of completing the project if it is not completed by the builder for some reason, including paying another builder to do the work
- Defects in materials
- Quality of workmanship of the builder and the subcontractors engaged by the builder
Whether you are covered by a guarantee or not, you still have rights under the Consumer Guarantees Act 1993 which provides legal remedies for faulty goods and services provided by the builder and subcontractors.
Most reputable builders will stand by their work and want to fix problems because their reputation, and therefore future work, often depends on what their clients say about them.
But if you are offered a guarantee, read it very closely so you understand its limitations. Find out if it covers:
- Labour-only work or full contract
- Projects only over a certain value
- Subsequent purchasers
- Find out how long you have to make a claim under the guarantee
- How long the guarantee period is
Read the fine print and find out what will invalidate it, for example if you withhold the final payment, and what special conditions apply. If in doubt, seek legal advice.
Don’t assume you are covered by a builder’s guarantee. Cover is not always automatic, and it may not be as comprehensive as you believe. You will probably have to fill out an application form and pay some money. Find out exactly what the guarantee covers, read all the paperwork and if necessary run it past your lawyer. Make sure any guarantees are specifically listed in your contract.
Because their builder was a RMB, Jack and Joan thought they were automatically covered by the RMBF guarantee. But when problems arose with faulty workmanship (missing piles resulting in an uneven floor and popping nails), they took a claim to the RMBF only to be told they hadn’t applied and paid for the guarantee and therefore were not covered. They had assumed the builder would organise this and include it in his price.
Problems with guarantees
Even if you have a guarantee, making claims on it can sometimes prove problematic. People who have spoken to ConsumerBuild about their guarantee have reported problems when asking for it to be honoured.
For example, new house owners who have refused to make the final payment owing on the house because there were so many things wrong with it, have been told that the guarantee was null and void because they withheld money. However, once that final money has been paid it can still be difficult to get any action out of the builder.
In a situation like this, it would be wise to contact the guarantee company and arrange to make the final payment to them to hold in trust until the work is completed satisfactorily.
Mike engaged a group housing company who used builders under a franchise system to build his new house. Mike had a lot of difficulty getting the builder to keep to deadlines and wasn’t happy with the quality of the workmanship. Eventually the builder lost his franchise just a few weeks before the house was finished.
The builder has now gone out of business without completing all the tasks identified after the 60 day maintenance period. Mike has been told that the contract was between him and the builder so the ‘five star guarantee’ is not applicable.
Mike has neighbours in the same subdivision who used the same company but moved into their house before the franchise was taken away. They also have had an ongoing battle to get remedial work done under the guarantee.
(2) PURPOSE OF THE CONSUMER GUARANTEES ACT
The Consumer Guarantees Act (CGA) can provide you with some protection for the quality of goods and services you purchase when you build a house or do other work around home.
The Consumer Guarantees Act 1993 (CGA) provides that goods and services must meet certain guarantees. In most cases, the manufacturer or the trader is bound by these guarantees.
The Act covers goods you buy, like materials and appliances for the house, as well as the services provided by your architect, designer, builder or other contractors. The Act does not apply to goods bought at auction or tender or at a private sale, for example, if you buy a second-hand mantelpiece through the paper. Neither does it apply when you buy an existing house and the land that goes with it.
Materials you buy must be:
- Of acceptable quality
- Fit for their normal purpose
- Fit for any particular purpose that you make known to the supplier
- A price reasonable for the type and quality of goods, where price has not been agreed
- Guaranteed as to title
- Where the goods are bought by the builder, and you buy them off the builder, then the builder is the supplier of those goods under the Act. This means that you have remedies against the builder as supplier. If you buy the goods direct from a retailer, your remedies will be against the retailer as the supplier of the goods.
The services provided by your designer, builder or other contractors must:
- Be performed with reasonable care and skill
- Result in fitness for a particular purpose
- Be completed within a reasonable time – if a time was not agreed beforehand
- Not cost more than a reasonable or going market price – if you did not agree on a price beforehand
If the goods and services don’t meet these standards you have remedies under the Act.
Guarantee as to title
When you buy goods you can expect them to be guaranteed as to title, i.e. they are being sold by the person with the right to sell them and that you own them completely.
If you buy goods where the supplier does not have the right to sell them, the guarantee as to title provides you with a claim against the supplier to have the defect in title corrected, or damages where this cannot be done.
Note that contracts for the supply of building materials frequently include retention of title clauses, which essentially reserve rights to the goods to the supplier until they are paid for.
What is acceptable quality?
Goods are of acceptable quality if they are fit to be used in such a way that is usual for that type of goods, they are reasonably durable, have no significant defects and are acceptable in look and finish.
For example, if you buy tiles to install in your new bathroom, you can expect them to be free from cracks and blemishes, and take the normal knocks expected in a bathroom (if they are sold as suitable for bathrooms). How durable the goods are depends on the type of goods, the price and any claims about them made on the packaging, the labels or advertising.
Note, however, that if the existence of any defect was specifically drawn to your attention, then the guarantee does not apply in respect of those goods.
What is fit for the particular purpose?
When you buy a product with a specific requirement, the guarantee provides that goods you are supplied with will meet your requirements. If, for example, you tell the shop when you are buying a heat pump system for your new home that it has to heat a 250 square metre home and it turns out the heat pump is simply not powerful enough, you have remedies under the Act.
When you are buying specialised equipment, like heat pumps, it would be wise to do some of your own research first – don’t necessarily rely on the person at the counter as they may not know the products well enough themselves.
What is reasonable care and skill?
When your house is being built, the builder and other contractors have to use reasonable skill and care so that the workmanship results in a house that is fit for living in.
For example, you are having a house built with concrete blocks. After moving in, a number of the blocks develop cracks which are not only unsightly, but they also leak. This could be a manufacturing problem but it could also be that the blocks were not installed to the right specifications. Not installing products correctly may be a situation where there was a lack of reasonable care and skill.
However, there are some circumstances where the builder or contractor may make it clear that you cannot rely on their care and skill. For example, if you ask the builder to build some elaborate fret-work and the builder says he will do his best but this is not his specialty. This should be carefully noted in the contract to limit the builder’s liability.
Remedies under the Act
Goods: In the case of breach one of the guarantees in the Act, if the fault is serious or can’t be fixed, you can choose between a replacement, a refund, or keeping the goods and paying a reduced price. If the fault is not serious, the supplier can choose between a repair, a replacement or a refund.
In either case, you can also claim for any extra loss caused as a result of the fault. Sometimes the best way to resolve a dispute with a supplier is to negotiate with them to find the most suitable remedy.
Where goods have been incorporated into real or personal property, you still have the right to reject the goods even though you can’t return them. In such cases, you can require the supplier to collect them at the supplier’s expense.
In all cases with faulty goods, you will also have the right to damages for any foreseeable loss resulting form the failure of the goods. For example, the wallpaper you bought turns out to be faulty. The pattern rubs off at the slightest touch and the supplier offers to replace the paper. You could also claim the cost of paying someone to re-hang the paper.
Services: In the case of services, where there is some failure in the services so that they breach a guarantee in the Act, you can ask for the problem to be fixed. For example, the plasterers splash plaster all over the brick-work and you ask them to clean the splatters. If they refuse or take too long to get back to you, you can get someone else to clean it and claim the cost off the plasterers. Or, depending on your contract with the plasterers, you may be able to refuse to pay the plasterers’ bill until the problem is fixed (that is if you haven’t paid already).
If the failure by the service provider cannot be fixed or is really serious you can cancel your contract for supply of services with them. Alternatively, you can require the service provider to compensate you for the loss of value of the product of the service, below the charge paid for the service.
You can also claim damages for any foreseeable loss resulting from a failure in the services you have received. Make sure to get proof of the faulty job and the loss caused by it, for example, get a written quote for the cost of repairs, take photos, or get a report by an independent expert.
Overcharging: If you have been charged more than the market price for goods or services, and you did not agree on a price with the supplier beforehand, you will only have to pay the market price. Phone around some other traders and find out how much they would have charged for the same goods or services, and offer to pay your supplier the going market rate in full and final settlement of their bill.
Marty recently had a house built through a building company and found out the painter used by the company was charging for tinting the paint on the feature walls in the house. The painter also claimed that the paint used on all the other walls was not a white base so this incurred an extra charge. Marty received a $700 account from the painter via the building company. However, Marty had inside knowledge and knew where the painter got his paint from and that the paint retailer/wholesaler absorbed the tinting cost and the painter was never charged for it. The painter had plucked the $700 figure out of the air and Marty refused to pay it. Marty says that this seems to be a standard rip-off in the painting industry and it pays to do your homework.
(3) GENERAL RULES ABOUT CONTRACTS
Having a contract with the people you engage to build your house or do other work around your home is extremely important. Some general rules about contracts and what to do if there is a breach.
There are some general rules about contracts which are legally understood and apply to any type of contract. See the section on contract law on www.consumer.org.nz.
The important thing about any contract, whether it is to buy a section or engage a designer or tradesperson, is to enter into a proper agreement that covers all the possible aspects of the arrangement and that you get it in writing.
Legally, contracts relating to the sale of land, disposition of any interest in land (including leases) and charges or mortgages over land, must be in writing and signed by the parties to the contract.
Warranties implied in building contracts
In the Building Act 2004, certain warranties are implied in all building contracts, whether specified in the contract or not. These include the expectation that the work will be done competently and using suitable materials.
Breach of contract by the builder scenario
Suppose your builder has substituted cheaper wallboard than that stipulated in the specifications, without getting a variation signed by you, as required in the contract. This is a breach of contract. What can you do about it?
In reality, there are almost always differences between products and by substituting the wallboard the builder is essentially making a design decision and any responsibility the designer has for the performance of the wallboard passes to the builder. So, if you are not happy with its final ‘fitness for purpose’ you could apply to the Courts for an award of damages. If you have already paid the builder, you could sue for the difference in cost, or for the cost of ripping out and replacing the substituted wallboard. You must be able to satisfy the Court that you have suffered loss and you will be required to quantify that loss.
If you haven’t yet paid you will be in a stronger position. You could refuse to pay the difference between the cost of the wallboard you asked for and the savings the builder made by using a cheaper product. Or you could negotiate for the builder to replace the wallboard before you pay up.
Breaches by the subcontractor
What happens when you think a subcontractor, say the roofer, has done a poor job? You should approach the main contractor, usually the builder. This is essentially a breach of the builder’s contract with you. Don’t go directly to the subcontractor. If things aren’t fixed to your satisfaction you could sue the builder who could, in turn, sue the roofer for breach of their contract.
What happens if your main contractor has gone into liquidation? Can you seek redress from the roofer directly? There is no contract between you and the roofer, so you can’t take action for breach of contract. But you may be able to sue for negligence. And you may be able to take action under the Consumer Guarantees Act.
To be successful in a claim for negligence you would have to prove that the roofer owed you a duty of care to do the work to a satisfactory standard, which they breached, and as a consequence you suffered some loss (which was not too remote). For example, you may have needed to pay someone else to fix the problems. Whether the subcontractor does owe you a duty of care depends on the facts which will be decided by the Court.
Liability of the builder
The liability of the builder was discussed in the Courts in the case of Riddell v Porteous (1999). The Riddells built a house hiring a builder, Mr Porteous, under a labour-only contract. The Riddells later sold the house to the Bagleys who discovered rot in the deck due to leaking. It was found that the deck had not been built according to the building permit. The Bagleys sued the Riddells for the expense of fixing the problem. The Riddells sued the builder for breach of his contractual obligation to build the house in compliance with the permit and fit for its intended purpose. The Riddells also sued the council for negligence in not carrying out the final inspection.
The Court held that the builder was in breach of his contractual obligations to the Riddels, therefore Mr Porteous was liable for the cost of the remedial work that the Bagleys were claiming from the Riddells. He was entirely in charge of the building contract despite the fact he was being paid on a labour-only basis.
In relation to the council, the Court held the council was liable to the Riddells for negligence in not carrying out the final inspection.
(4) IMPORTANCE OF THE CONTRACT
A written contact protects your interests and sets out your rights and obligations. It also gives your building contractor an incentive to build right first time.
You should have a written contract with your builder. The builder, as main contractor, will organise the contracts with the subcontractors. However, if you are managing the project yourself under a labour-only contract with the builder, you will have to arrange contracts with each of the contractors, for example, the plasterers, painters and plumbers.
Contracts don’t have to be written to be legally binding but when all the terms and conditions are clearly spelt out and recorded in writing, it means there is less room for argument about who is responsible if something goes wrong.
Some people rely on the written quote, or a list of tasks given to them by the builder, as the contract. This is fine provided everything goes according to plan. But if something goes wrong, these bits of paper are unlikely to provide enough detail about the rights and responsibilities of the builder and yourself.
Form of contract
Many building companies and individual builders will have their own form of contract. There is also a New Zealand Standard form of contract (NZS 3902:2004 House Building Contract) that has been independently developed by Standards New Zealand and is available for purchase.
Even if you decide to use another form of contract, it might be useful to compare it to the NZ Standard to make sure the one you are being offered is fair and reasonable.
There are also a number of other standard contracts available from these organisations: Certified Builders Association of NZ, (CBANZ) Registered Master Builders Federation, (RMBF) NZ Institute of Architects, (NZIA) The CBZNZ and RMBF contracts are only available to members, but you can buy a copy of the NZIA contract.
It is likely that your builder is familiar with them or has a copy. Don’t accept them at face value, you may want to negotiate changes to some of the clauses.
What should the contract include?
A written contract should include the following:
- the name and address of both you and your builder
- a full description of the work, including materials and products to be used
- who pays for the building consent and other council fees
- a statement that the building contractor is responsible for making sure that building work meets Building Code requirements
- dates when the work will start and be completed
- warranties detailing what is covered and for how long
- information about how any disputes will be resolved
- a clear payment schedule that lays out when and how much you will be charged (structure your payments so they are aligned to the cost of completing each stage of your project - avoid a large up-front payment)
Take time to read the contract – don’t sign it straight away. You may want to negotiate changes to some of the clauses.
Remember: A contract is only enforceable when both you and the contractor have signed and dated it. Remember to initial every page and keep a copy.
Alterations to contracts
To make changes to a contract, you can rule out by hand what you want to delete and write in the changes. You and the builder will both have to initial the changes. Be careful of what effect the changes might have on other clauses. Clauses in a contract are often interrelated. Finally, make sure that changing the contract won’t affect any guarantees. If you have any doubts seek legal advice.
Implied warranties in building contracts
All residential building work is covered by the warranties set out in the Building Act. Your building contractor may have written these warranties into the contract, or be offering an additional guarantee. Check the contractor’s warranty or guarantee against the implied warranties to ensure they at least match. Ask your contractor how their guarantee or warranty works.
What are the implied warranties?
- The building work will be done properly, competently, and in accordance with the plans and specifications.
- All the materials used will be suitable and, unless otherwise stated in the contract, new
- The building work will be consistent with the Building Act and the Building Code
- The building work will be carried out with reasonable care and skill and completed within the time specified, or a reasonable time if no time is stated
- The household unit will be suitable for occupation at the end of the work.
- If the contract states any particular outcome and the owner relies on the skill and judgement of the contractor to achieve it, the building work and the materials will be fit for purpose and be of a nature and quality suitable to achieve that result.
These warranties apply to all contracts for building work involving household units, whether written or verbal. They also apply to the sale of one or more household units by a residential property developer. It is not possible to contract out of them.
For example, under the Building Act, if the builder substitutes lower quality wallboard than is stipulated in the specifications without your agreement and this causes damage to the property, this is a breach of contract. The implied warranty states that work will be done in accordance with the plans and specifications.
Putting it right
If you believe any of the warranties have been breached, you can take the tradesperson to court for breach of contract. You can do this whether you are the person who employed the tradesperson, own the property, or in some circumstances if you are a subsequent owner of the property (depending on the time involved).
Proceedings for a breach of the implied warranties may be taken in the District Court or High Court depending on how much money is involved. Clear evidence will be needed to support the claim. To be successful in Court, you will have to show you have suffered loss or damage as a result of the actions of the tradesperson. The Court can award the consumer compensation for the breach.
Disputes under $15,000 can be settled by the Disputes Tribunal. Disputes Tribunals are not like the formal courts. There are no lawyers or judges. A trained referee will hear the dispute and any ruling they make is binding and can be enforced by the courts. If the disputed amount is between $15,000 and $20,000 you can still go to the Disputes Tribunal if the other party agrees.
Hold on to your paperwork
It is a good idea to keep copies of your contract for your own reference and for subsequent purchasers, so that if something goes wrong later on there is a paper trail to work out who is responsible. This is particularly useful for the person who buys your house and doesn’t know who to contact if the house develops problems at a later date due to poor workmanship. The warranties may still be able to be invoked, depending on how much time has passed.
Get a lawyer to check the contract to make sure everything is covered. Don’t forget that both you and the builder must sign it, date it and initial each page.