Duty of Care in Residential Building Cases

Legal Directions

Introduction

In 1995, the High Court of Australia in Bryan v Maloney (1995) 182 CLR 609 found that a builder of a home owed a duty of care in tort to a subsequent owner where defects in footings had caused cracking. That decision has lost some of its significance because of statutory intervention permitting subsequent owners to sue builders (including owner-builders). However, for other parties involved in domestic building work, this decision is seen as increasing exposure to claims in tort. That position can be contrasted with commercial building cases.

In 2003, in Woolcock Street Investments Pty Ltd v CDG Pty Ltd & Anor (2004) 216 CLR 515, the High Court held that an engineer did not owe a duty of care to a subsequent purchaser of a warehouse and office complex, where deficiencies in the engineer’s design of the foundations caused structural distress. Then, last year, in Brookfield Multiplex Limited the Owners-Corporation Plan 61288 (2014) 254 CLR 185, the High Court decided that a builder owed no duty of care to the subsequent owner, an owners corporation, of a high rise building used as serviced apartments.

While it may be more likely that a duty of care will be found in domestic building cases, ultimately whether that is so will depend on a detailed consideration of the circumstances. This is illustrated by two recent decisions of the NSW Supreme Court, which found no duty of care was owed by an engineer and a sub-contractor in respect of works undertaken on residential buildings.

Chan v Acres [2015] NSWSC 1885

Mr Acres acted as an owner-builder in extending his home. An engineer prepared structural drawings for the renovations and undertook regular inspections of the work by sub-contractors engaged by Mr Acres. He also engaged the local council as the prescribed compliance authority (under the relevant NSW legislation, the equivalent of a building surveyor).

Mr Acres sold his property to the plaintiffs. They had obtained a pre-purchase inspection report, which identified a number of defects. In the sale contract, the plaintiffs acknowledged that they were buying subject to all latent or patent defects, with specific clauses dealing with some, but not all, of the defects identified in the pre-purchase inspection.

After the plaintiffs moved into the home they became aware of significant structural defects in the work undertaken by Mr Acres. Those defects had not been identified in the pre-purchase inspection. They sued Mr Acres, the pre-purchase inspector, the engineer and the council. The claim against the pre-purchase inspector settled before trial.

The decision

The claim against Mr Acres was brought pursuant to the Home Building Act 1989 (NSW) (‘the HBA’), the legislation in NSW permitting subsequent owners of homes to sue builders for defective building work. The court found in favour of the plaintiffs, as the building work for the extension was defective. While the engineer’s structural drawings were not deficient, it was apparent that the sub-contractors engaged by Mr Acres had ignored them in many respects.

The engineer conceded that if a duty in tort was owed to the plaintiffs as subsequent owners, then that duty had been had breached in conducting inspections of the work. However, the court found that no duty was owed, as the plaintiffs were not in a legal sense vulnerable to the engineer’s conduct.

Key issues in determining if the plaintiffs were vulnerable were whether:

  1. The engineer had assumed responsibility for work to subsequent purchasers
  2. The plaintiffs had relied upon the work of the engineer when purchasing their home
  3. The plaintiffs were able to protect themselves from harm if the engineer was negligent.

There was no evidence going to the questions of assumption of liability and reliance. In Bryan v Maloney the High Court, in the absence of such evidence, was prepared to infer the assumption of responsibility of a builder of a home to undertake its work properly, and reliance by a subsequent purchaser on the builder, to reflect the community’s general expectations. That was so given the significance of a home purchase to a subsequent owner and the unsophistication of home buyers. However, Justice McDougall was not prepared to adopt that reasoning in relation to the engineer, considering it was in a different class to a builder. That was the more so, given the plaintiffs’ willingness to accept the risk of defects in the sale contract and the legislation permitting subsequent owners to sue builders. While the court did not accept that the plaintiffs were in a position to protect themselves, in the circumstances that did not mean a duty ought be imposed.

On the assumption that the engineer did owe a duty of care, despite the engineer’s admission, the court said it would not have found the engineer liable to the plaintiffs. The court was not satisfied that a breach of duty by the engineer would have caused any loss, because it doubted that any direction given by the engineer would have been followed by Mr Acres’ sub-contractors, given their willingness to ignore the structural drawings.

In relation to the council, Justice McDougall found that it owed the plaintiffs a duty of care, which had been breached and caused the plaintiffs’ loss. There were a number of critical differences between the position of the council and that of the engineer, such as:

  1. The statutory scheme pursuant to which the council acted as the prescribed compliance authority, undertook inspections and issued an occupancy certificate
  2. The court had actual evidence from the council certifier that he understood subsequent purchasers might rely upon that certificate, and evidence from the plaintiffs that they had taken comfort from it
  3. The court was satisfied that Mr Acres would have ensured compliance with council directions.

The Owners SP 74602 v Brookfield Australia Investments Limited [2015] NSWSC 1916

The plaintiff was an owners corporation and registered proprietor of a common property of a building comprising 241 residential lots. Brookfield Australia Investments Pty Ltd (‘Brookfield Australia’) constructed the building pursuant to a design and construct contract with the developer, Eastmark Holdings Pty Limited (‘Eastmark’). The other defendant, G James Glass and Aluminium Pty Limited (‘G James’) was a subcontractor of Brookfield that designed and constructed certain elements of the façade of the building.

The owners corporation claimed damages from Brookfield Australia and G James for alleged breaches of their duty of care and breaches of statutory warranties pursuant to s18B of the HBA. The most significant of those claims was a claim that the façade needed to be replaced due to systemic water ingress through the window assemblies.

Duty of care

The owners corporation attempted to distinguish the High Court decision in Brookfield Multiplex. It contended (amongst a number of grounds) that Brookfield Australia and G James owed it a duty of care as there was no sophisticated building contract in place and no contract regulating the rectification of defects. Further, the lot owners were not sophisticated investors but acquired their lots as residential dwellings, not serviced apartments.

Justice Stevenson found that there was no evidence as to the identity of the lot owners of the property and that some lot owners may have been owner occupied and others may well have been investors. There was a building contract in place which contained detailed provisions concerning defects and a 12 month liability period. Further, unlike the owners corporation in Brookfield Multiplex, the owners corporation had the benefit of statutory warranties under the HBA which made an even stronger case than Brookfield Multiplex for refusing to find a duty of care as the owners corporation was not then vulnerable (ie – they had a statutory claim against Brookfield Australia irrespective of any claim in negligence).

His Honour found that the availability of statutory warranties against Brookfield Australia justified the conclusion that the owners corporation was not vulnerable to any defective workmanship by Brookfield Australia’s subcontractor, G James.

His Honour concluded that neither Brookfield Australia nor G James owed a duty of care to the owners corporation.

Application of HBA to sub-contractors

The owners corporation contended that Eastmark was a ‘non contracting owner’ in relation to the subcontract between G James and Brookfield Australia and that the effect of s18D(1A) of the HBA was to provide Eastmark, as a non-contracting owner, with the same rights against a sub-contractor, G James, as Brookfield Australia had in respect of the s18B warranties implied in the subcontract. The owners corporation by reason of s18D(1) of the HBA was a successor in title to Eastmark and therefore entitled to the same rights as Eastmark. His Honour noted that if this interpretation was accepted, it would have dramatic implications as it meant that an owners corporation would be entitled to sue for breach of s18B warranties against  the builder’s subcontractors, the sub-contractor’s subcontractors and so on.

His Honour was not prepared to accept the owners corporation’s interpretation. His Honour found that the definition of ‘non contracting owner’ as defined in Schedule 1 of the HBA directs attention to the entity that is the ‘owner of the land’ and includes ‘any successor in title’ to that entity. That entity (and its successor in title) is a ‘non-contracting owner’ if it is not a party to the contract to undertake residential building work on the land owned by that entity (ie – the building contract). Section 18D(1A) speaks of a person who is a non-contracting owner ‘in relation to a contract to do residential building work’ and in His Honour’s view that contract must be the same contract referred to in the definition of ‘non-contracting owner’, namely the building contract, as opposed to any sub-contract down the line.

His Honour referred to the second reading speech and explanatory note to the legislation which amended s18D(1A) following the decision of Ace Woollahra Pty Limited v The Owner – Strata Plan No. 61424 [2010] NSWCA. The reason for the amendment was to ensure that where a contractor entered into a contract for residential building work on land with a party who was not the owner of the land (such as an intermediary developer), the owner of the land will be deemed to be a person on whose behalf the work is done and would be entitled to the benefit of any statutory warranty. It does not go as far as to give the developer any right against subcontractors of the builder.

Comments

G James was successful in its defence in establishing that it did not owe a duty of care to the owners corporation and did not owe any statutory warranties to the plaintiff under the HBA. The correct approach was for the owners corporation to bring a claim pursuant to the HBA against the builder, Brookfield Australia who should then bring a cross-claim against any sub-contractor without the owners corporation bringing any direct claim against the sub-contractor.

The decision follows the High Court’s decision in Brookfield Multiplex and arguably extends its operation to residential owners corporations (unless vulnerability and reliance exist), for which statutory warranties would nonetheless exist.

Moray & Agnew acted for G James in the successful defence of the Owner Corporation’s claim.

Authored by Scott Krischock, Special Counsel, Melbourne and Shaun Jackson, Senior Associate, Sydney


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