Defective works: No duty of care decision

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1 Defective works: No duty of care decision Daniel Russell and Scott Chambers This article was first published in the Law Society Journal August 2012 Vol 50 No. 7 Melbourne 1 Sydney Brisbane

2 Contents In summary 3 The authorities 3 Bryan v Maloney 3 Woolcock 4 The interaction between tort and contract 4 Duty of care and the statutory warranties 4 Eko Investments 5 The decision in Brookfield 5 Impact 5 Endnotes 6 Contact us 6 Important note: This paper is not legal advice and you should not rely on the matters contained within it. You should seek legal advice regarding any of the issues dealt with. This is a complex area of law which regularly changes. Not all of the relevant issues are dealt with in this paper, and many of our comments are necessarily summary in nature. Views expressed are as at 1 August

3 Defective works: No duty of care decision for residential building Daniel Russell and Scott Chambers Recent changes to home building laws have seen a truncation in the duration of statutory warranties for defective work. Remedies for home owners may have contracted still further now a court has held that no common law duty of care arises. n recent years, it has been a common, if not universal practice, for claims by owners corporations of residential strata schemes against builders and property developers over defective building works to be brought on two key grounds: first, on the statutory warranties established by Part 2C of the Home Building Act 1989 (the Act), and second, in the tort of negligence. Perhaps more than any other reason, the tort of negligence has been pleaded either due to the action for breach of statutory warranty being out of time (or at risk of being so) or because that time limit is so notoriously difficult to estimate with any certainty to begin with. At the same time, as this practice of pleading has developed, the question of whether, and if so in what circumstances, such a cause of action in negligence arises has been the subject of significant debate in the profession. Prior to the decision of McDougall J in Owners Corporation Strata Plan v Brookfield [1] (Brookfield), the most recent Supreme Court authority seemed to suggest that such a duty exists, although in limited circumstances.[2] In Brookfield, in answering a preliminary question, McDougall J held that no duty of care was owed by either a builder or a developer to an owners corporation in respect of defective works, leaving the owners corporation to pursue its cause of action for breach of statutory warranty under the Act. The facts and circumstances of Brookfield are common to many actions brought by owners corporations against builders and developers. While it remains to be seen whether an appeal ultimately flows from McDougall J s decision, there is every chance that his judgment will be relied upon in other matters, and in turn those matters may bring the question before the Court of Appeal, or in turn the High Court, for resolution. In summary A builder and developer who constructed a residential strata scheme under a detailed contract did not owe a duty of care to the owners corporation regarding defective works. Consistent with previous authorities although refocusses attention on certain aspects. May be distinguished in other circumstances, such as owner-builders, where builder and developer were the same or a related entity, or where contract was not a genuine bargain. Does not directly affect previous authorities regarding liability of architects and certifiers. Other statutory, common law or equitable causes of action may still arise. May be challenged on appeal or in subsequent decisions. The authorities Bryan v Maloney Since the High Court in Woolcock Street Investments v CDG Pty Ltd [3] cast doubt on its own earlier decision in Bryan v Maloney,[4] there has been uncertainty as to whether a builder owes a duty of care to a subsequent purchaser of a residential building.[5] Almost immediately the subject of substantial criticism,[6] Bryan v Maloney held that a sufficient relationship of proximity existed to give rise to a duty to take reasonable care on the part of Mr Bryan, a builder of a house, to avoid economic loss being suffered by Mrs Maloney, a subsequent owner of that house, in respect of the repair of damage caused by hidden defects in the foundations.[7] It is clear that the High Court, in Bryan v Maloney, considered its decision to be an extension to pure economic loss of the existing authority in Voli v Inglewood Shire Council,[8] regarding physical damage and injury (in that case resulting from the negligence of an architect that lead to the collapse of a stage in a public hall).[9] 3

4 Defective works: No duty of care decision Woolcock In Woolcock, the High Court was asked to consider whether an engineer owed a duty of care to the subsequent owner of commercial premises for economic loss due to defective works. Pointedly, the High Court in Woolcock held that the finding of a duty between builder and subsequent owner in Bryan v Maloney was dependant on the anterior step of finding a duty between the builder and the original owner of the land.[10] The plurality in Woolcock also noted that the focus on proximity as the conceptual determinant and unifying theme of duty of care had been abandoned subsequent to Bryan v Maloney.[11] Importantly, the High Court in Woolcock, following Perre v Apand [12], held that a key element in finding that a duty exists in respect of pure economic loss is a finding that the plaintiff was vulnerable to the negligence of the defendant, in the sense of the plaintiff being unable to protect itself from the consequences of the defendant s want of reasonable care.[13] The interaction between tort and contract In Bryan v Maloney, the majority held that the contractual duty in the case between the builder and original owner was not an impediment to a tortious duty being owed to a subsequent purchaser, and on the contrary could support the finding of such a duty, noting that the contract was non-detailed and contained no exclusion or limitation of liability.[14] Further, citing Voli, the Court held that, even if there was such an exclusion of liability, it could not directly operate to discharge a duty owed to strangers to the contract.[15] Brennan J in dissent stated forcefully that: It would be anomalous to have claims relating to the condition of the building by an original owner against the builder determined by the law of contract if the relief claimed by the remote purchaser against the builder would be determined by the law of tort. [16] In Woolcock, the plurality commented, also citing Voli, that the terms of the contract between the original owner and the builder is not an irrelevant circumstance in considering what duty a builder or engineer owed others, and that, at the least, such a contract defines the tasks which the builder or engineer contracts to undertake.[17] In his concurring decision, Callinan J went further than the joint judgment, holding (citing Astley v Austrust 4 [18]) that a clear compartmentalization [between contract and tort] remains a live, indeed a flourishing plant in Australian jurisprudence. [19] Additionally, the existence of, or ability to negotiate, contractual protections was noted by McHugh J in both Perre vapand and Woolcock as being a fundamental question in determining whether a plaintiff was vulnerable in the necessary sense.[20] Duty of care and the statutory warranties In NSW, subsequent owners of residential dwellings (including statutory successors such as owners corporations of strata schemes) are afforded the benefit of statutory warranties under Part 2C of the Act against builders and in certain circumstances also against developers. A fertile ground for debate in the area has been the question of whether a party having the benefit of such statutory warranties can be vulnerable in the sense set out in Perre v Apand and Woolcock. At the same time, there is an undercurrent of doubt in the authorities over whether it is appropriate for the common law to consider imposing such liabilities at all. In Bryan v Maloney, Brennan J in dissent said: [T]he courts should not decide to extend remedies not hitherto available to remote purchasers of buildings without considering the cost to builders and the economic effect of such an extension. Those are questions which the courts are not suited to consider. The extension of remedies in that direction is properly a matter for Parliament. [21] In Woolcock, Callinan J, in his concurring opinion, expressed the view that if commercial freedom is to be impaired in this way it is better done by statutory intervention,[22] an issue alluded to but not taken up in the joint judgment.[23] In Zumpano v Montagnese, Brooking JA of the Victorian Court of Appeal expressed doubt that the Victorian equivalent of the statutory warranties could co-exist with a common law duty of care.[24] In Taitapanui [25] the Victorian Court of Appeal later expressed doubt that those same warranties could displace a common law duty owed by a surveyor.[26] Eko Investments Both the decision in Zumpano and in Taitapanui were considered by her Honour Bergin J of the Supreme Court in Eko Investments Pty Limited v Austruc

5 Defective works: No duty of care decision Constructions Limited & Ors.[27] In that case a designer was liable to an owners corporation in respect of a negligent failure to design certain windows with sub-sills. Having considered the authorities in respect of vulnerability, her Honour ordered that a referee s report be adopted in so far as it held the owners corporation was vulnerable in respect of that particular negligence, as it had no protection under the statutory warranties in that regard.[28] Under Eko, prior to the decision of McDougall J in Brookfield, attention was focused on the question of vulnerability in determining whether an owners corporation was owed a duty of care in respect of defective works by the building professionals who constructed the property. The decision in Brookfield McDougall J s decision in Brookfield, however, focusses on other strands of the authorities. In dealing with allegations that a duty of care was owed by both a builder and a developer to the owners corporation of a strata scheme constructed by them, his Honour focused not on the question of vulnerability, as was the case in Eko, but rather on the policy question of whether the common law should impose a duty when such a duty is properly a matter for parliament to consider. As against the builder, his Honour said: In circumstances where the legislature has considered, and made clear provision for, the extent to which a builder is liable to a subsequent owner, I think that the courts should be slow to substitute their own judgment for that of the legislature. [29] His Honour made a similar finding in respect of the developer.[30] Importantly, in reaching this conclusion, McDougall J draws primarily on the forceful dissent of Brennan J in Bryan v Maloney, an extract of which is quoted by McDougall J at [144]. His Honour noted that Bryan v Maloney was decided under the now defunct proximity doctrine,[31] before adopting the characterisation of the reasoning in Bryan v Maloney set out in the joint judgment in Woolcock, namely that the finding that a duty was owed by the builder to the subsequent owner of the house rested on the anterior step of finding a duty between the builder and the original owner. McDougall J held that no such anterior duty could arise as the builder and developer had negotiated, on what seems to be an equal footing, a detailed contract in which each bargained for what it would give as the price for what it would receive. Citing Astley v Austrust,[32] his Honour stated that [t]here is no basis on which the court should usurp the parties bargain. Although his Honour held that the issue did not need to be decided, and his Honour s views on this point must be considered dictum, McDougall J further said that, since he had held that the owners corporation had the benefit of the statutory warranties, it was questionable whether the owners corporation was vulnerable in the sense considered in Perre v Apand and Woolcock. This aspect of his Honour s decision appears consistent with the approach taken by Bergin J in Eko. Impact While not an extraordinary conclusion in light of the authorities considered above, McDougall J s judgment nonetheless strikingly refocuses attention on aspects of those authorities which have not recently found a voice. In Brookfield, his Honour commented that the question of imposition of a duty of care is one for consideration either at the final appeal level or by the legislature [33] and it may be that the former is ultimately the forum where these issues are resolved. Taking a broader perspective, recent legislative developments bring home the practical importance of this decision. For residential construction contracts entered into after 1 February 2012, the period for commencing proceedings for breach of the statutory warranties in the Act have been truncated from seven years to two years for non-structural defects and six years for structural defects.[34] The changing landscape in this area of law including his Honour s decision in Brookfield may well change further following the NSW government s current review of the Act. In the circumstances, it might be expected that plaintiffs will increasingly explore alternative common law, equitable and statutory causes of action to satisfy defective works claims that cannot be maintained under the Act or in negligence for one reason or another. Plaintiffs and defendants in actions presently on foot will need to carefully consider the merits of their positions in respect of any allegations of such a duty of care, and the strategic merits of moving, or defending, a motion for interlocutory relief in that regard. 5

6 Defective works: No duty of care decision Endnotes [1] [2012] NSWSC 712 (Unreported, McDougall J, 29 June 2012). [2] Eko Investments Pty Limited v Austruc Constructions Limited & Ors; The Owners Strata Plan No v Austruc Constructions Limited & Ors [2009] NSWSC 208 (Unreported, Bergin J, 31 March 2009). [3] (2004) 216 CLR 515; [2004] HCA 16. [4] (1995) 182 CLR 609; [1995] HCA 17. [5] This line of authorities generally applies to building professionals such as builders, developers, engineers, architects and designers, however it should be noted that a separate line of authority applies in respect of statutory authorities such as Councils (see Owners v Rockdale [2008] NSWSC 392) or parties exercising statutory functions such as building surveyors (Taitapanui, cited below). [6] See eg Brooking JA in Zumpano v Montagnese [1997] 2 VR 525. [7] At [19] per Mason CJ, Deane and Gaudron JJ. [8] (1963) 110 CLR at 85. [9] At [15-17] per Mason CJ, Deane and Gaudron JJ. Note the Civil Liability Act 2002 contains provisions affecting the standard of care for professionals (see Division 6 of Part 1A). [10] At [14] per Gleeson CJ, Gummow, Hayne and Heydon JJ. [11] At [18] per Gleeson CJ, Gummow, Hayne and Heydon JJ. [12] (1999) 198 CLR 180; [1999] HCA 36. [13] At [23] per Gleeson CJ, Gummow, Hayne and Heydon JJ. [14] At [10] per Mason CJ, Deane and Gaudron JJ. [15] At [15] per Mason CJ, Deane and Gaudron JJ. [16] Per Brennan J at [25]. [17] At [28-30] per Gleeson CJ, Gummow, Hayne and Heydon JJ. [18] (1999) 197 CLR 1. [19] At [221] per Callinan J. [20] See per McHugh J in Woolcock at [ ]. [21] Per Brennan J at [25]. [22] Per Callinan J at [227] (see also [233]). [23] Joint judgment at [35]. [24] [1997] 2 VR 525 at 527. [25] Moorabool Shire Council v Taitapanui (2004) VSC 239. Special leave to appeal to the High Court was refused (see [2006] HCATrans 328). [26] Per Ormiston and Ashley JJA at [181]. [27] Eko Investments Pty Limited v Austruc Constructions Limited & Ors; The Owners Strata Plan No v Austruc Constructions Limited & Ors [2009] NSWSC 208 (31 March 2009). [28] Per Bergin J at [65], [66], [103]. Her Honour s decision was on this issue was appealed, and overturned, on different grounds (on the basis of an incorrect application of the relevant authorities for determining the time limit for the proceedings to have been brought see Cyril Smith & Associates Pty Ltd v The Owners- Strata Plan No [2011] NSWCA 181 (6 July 2011)). [29] At [144]. [30] At [ ]. [31] At [146]. [32] (1999) 197 CLR 1 per Gleeson CJ, McHugh, Gummow and Hayne JJ at [47]. [33] At [128]. [34] See Section 18E of the Home Building Act Contact us Daniel Russell (02) Scott Chambers (02)

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