If you are a builder or a tradesperson and you enter a contract to carry out residential building work in NSW that is valued over $20,000.00 (including GST) you must prior to commencing works or demanding or accepting payment under the contract (including by way of a deposit) take out insurance under the Home Building Compensation Fund (HBCF). You must provide a certificate of HBCF insurance as evidence to the other party prior to commencing works or demanding / receiving payment.

There are severe consequences if you fail to do this:

• A fine of up to $110,000 for a company or $22,000 for an individual.
• In the case of an individual, if you are convicted of a second or subsequent offence in relation to this requirement, you may be fined up to an amount of $55,000.00 and/or a 12-month jail term.
• You are not entitled to enforce any remedy under the contract against the other person even if that person has breached the contract. However, you may still be liable for any breach of contract you have committed and subject to any remedy enforced by the other person.
• You are not entitled to receive payment or recover any money under the contract with respect to the works undertaken.

These penalties are enforced by the NSW Building Commission under the Home Building Act.

However, there are several pitfalls and exceptions to the above requirements:

• The nature of the works under your contract may not come under the definition of “residential building work”, for instance demolition work or stand-alone contracts for internal painting.
• You are not required to obtain HBCF insurance if you carry out residential building work under a sub-contract with the head contractor or as an employee of the head contractor. Accordingly, you must be certain prior to finalising your residential build contract whether or not you are the party responsible for obtaining HBCF insurance.
• As explained above, if you fail to take out HBCF insurance you will not be able to demand or receive payment under the contract or enforce any remedy for the other person’s breach of contract. However, as an exception to this rule, you may apply to the tribunal (NCAT) for payment to be made in relation to works completed despite the absence of HBCF insurance. The tribunal will only grant an order if it considers it “just and equitable” to do so and the value for any such works will not be calculated by reference to the contract but by the tribunal’s own calculation of the “reasonable market cost of the labour and materials” (so-called “quantum meruit” basis).
• The $20,000.00 threshold is valued with reference to the whole of the works even if those works are divided into stages with each stage covered by its own contract. Accordingly, a holistic approach is required when assessing the $20,000.00 threshold.
• Works covered by a particular policy of HBCF insurance includes not only the original works but also any subsequent defect rectification works. Accordingly, be aware that a claim may still be made against your HBCF insurance policy for rectification works you have been required under the contract to complete after the date of practical completion.
• If you commence works without having first obtained HBCF insurance, then such a failure may be remedied by you subsequently obtaining the appropriate insurance. In this case you will be able to enforce your rights under the contract with respect to the works.

If you are a residential builder or tradesperson do not take the risk when it comes to obtaining HBCF insurance. If you have any questions, or you find yourself in a dispute with regard to your policy or how it is affecting your rights under a residential build contract do not delay, speak to Hamilton Mott today.