The Court of Appeal rejected a novel claim by a subsequent purchaser of a residential property to recover damages for pure economic loss from the local Council.

In Issue

  • Whether Council, as principal certifying authority, owed the purchaser of residential premises a duty to take reasonable care in the issue of an occupation certificate to avoid their suffering economic loss as a result of the previous owner-builder’s defective building work

The Background

Mr Acres owned a residential house in Wahroonga. He carried out significant renovations and extensions (the works) to that property as owner-builder in 2008 and 2009. The works consisted of a two-level extension at the back of an existing house. MHE (an engineer) was retained by Mr Acres to prepare structural drawings and, from time to time, to undertake inspections of the works as they proceeded. Mr Acres appointed the Council as principal certifying authority to provide the services of a principal certifying authority in accordance with Environmental Planning and Assessment Act 1979 (NSW) (EPA). The Council issued a final occupation certificate (the certificate) pursuant to the EPA in July 2010.

In about March 2010, Mr Acres sold the house to Ms Chan & Mr Cox (the purchasers) who discovered structural defects including that the lower level block walls were not structurally adequate to support the weight of the overlying structure. There were several other respects in which the building work was defective including that the internal stairs were non-compliant and there were problems with wet area waterproofing.

The purchasers later commenced proceedings against Mr Acres, MHE and Council claiming damages for the cost of rectification of the defects.

The Decision at Trial

The trial judge held Mr Acres liable to the purchasers for breach of the warranties implied by the Home Building Act 1989 (NSW). The claim against MHA was dismissed. The trial judge held that the Council owed and breached a duty to the purchasers to take care in issuing the occupation certificate and also that it was liable in contract and in tort to indemnify Mr Acres against the purchaser’s claim.

The Issues on Appeal

The Council appealed. It denied any common law duty of care to the purchasers as subsequent owners and also denied the existence of any statutory duty of care. It pleaded reliance on defences under the Civil Liability Act 2002 (NSW).

The Decision on Appeal

The Court of Appeal unanimously allowed the appeal and held that the Council did not owe a duty of care to the subsequent owner to prevent economic loss.

The Court of Appeal noted that, in accordance with established principles, in a case where a novel duty of care to avoid economic loss is propounded, it is necessary to assess the presence or absence of foreseeability of harm, reliance and assumption of responsibility, and vulnerability to determine whether a duty of care should be imposed.

The risk of harm which must have been foreseeable was the prospect of economic loss suffered as the result of acquiring ownership of a residential property with latent structural defects. Even allowing for the existence and availability of statutory warranties and home warranty insurance, it was still reasonably foreseeable that a subsequent purchaser would suffer some loss in the event of insolvency of the owner builder or the statutory insurance being insufficient.

In relation to reliance and assumption of responsibility, the Court of Appeal noted that the purchasers’ evidence was of no more than a general expectation that the Council had acted properly or reasonably in issuing the certificate. The purchasers expressly acknowledged by special condition 16 of the contract for sale that the certificate might be wrong, and Mr Cox’s unqualified evidence was that he accepted there might be latent defects. The importance of the statutory context in which the certificate was issued was stressed. The certificate did not, in terms or effect, certify that the building work did not contain latent defects or that the works complied with the relevant plans or specifications. The function of the Council as principal certifying authority was regulatory only and therefore there was no reason why the Council ought to have realised that the purchasers would have relied on the issue of the certificate to decide whether to buy the property and on what terms. As a result, the requisite reliance or assumption of responsibility was not made out.

Turning to vulnerability, the Court of Appeal concluded that the purchasers were not vulnerable to any want of care on Council’s part because they had the benefit of statutory warranties from Mr Acres, and they were able to negotiate the price and terms on which they purchased the property to protect themselves from the risk of economic loss presented by latent defects.

The Council was therefore not subject to a duty of care and its appeal was allowed.

Although it was unnecessary to do so, the Court of Appeal held that MHE was not a concurrent wrongdoer and Mr Acre’s liability to the purchasers was not an apportionable claim. The Court of Appeal also allowed the Council’s appeal from the finding that it was liable to indemnify Mr Acres because, in the absence of Council having undertaken to supervise compliance with the relevant legislation, consents and approvals, it was not liable for the works that did not comply and contained the defects for which Mr Acres was now liable.

Implications for you

This decision is a useful reminder that the courts will refuse to impose a duty of care to avoid economic loss where foreseeability, reliance and assumption of risk and particularly vulnerability are not made out. The decision also reiterates that to succeed on such a claim it is necessary to establish vulnerability in the sense of an inability to protect oneself from the consequences of a defendant’s want of care. It is not sufficient if all that is shown is that negligence caused a reasonably foreseeable loss.

Ku-ring-gai Council v Chan [2017] NSWCA 226