NSW building industry to have greater liability for defective building work
First published 3 March 2019
The long awaited response of Australia’s state and territory governments to the recommendations of the Shergold and Weir report into building regulation may contain a surprise, based on the response of the NSW Government.
The NSW Government’s response includes an unexpected component, that was not contemplated by the Shergold and Weir recommendations. The NSW Government is proposing to impose a new duty of care on all “building practitioners” in favour of owners’ corporations, subsequent residential homeowners and unsophisticated development clients.
The Building Ministers’ Forum - ie the federal, state and territory government ministers responsible for building and construction regulation - reconfirmed earlier this month its commitment to develop a joint response to the Shergold and Weir recommendations and, wherever possible, adopt reforms consistent with those in place or proposed in other jurisdictions. Based on this, we should expect the other states and territories will follow the NSW Government’s lead. But the pre-emptive release of a separate response by the NSW Government suggests that it may have broken ranks, so we will have to wait and see what the other states and territories do.
The NSW Government’s position could represent a significant development in the law
For reasons explained below, most subsequent owners of buildings that discover defects arising from the design or construction of the building have no legal remedy against the builder and other parties involved in the design or construction of the building.
The NSW Government’s proposal will provide subsequent owners of certain buildings with a new statutory right to sue any building practitioner involved in the design, engineering, construction or certification of the building that fails to carry out its work with reasonable care.
The legal significance of this proposal depends on the extent to which it applies to non-residential building work.
For residential building work, subsequent purchasers (including owners’ corporations) already have a legal remedy against the builder in respect of defective building work, by virtue of the statutory warranties of due care and skill, and fitness for purpose, contained in residential building legislation in most states and territories. Subsequent purchasers of residential buildings will often (but not always) also have a legal remedy against the builder, the building certifier and perhaps others involved in the design or engineering of the building, under the common law tort of negligence.
However, the statutory warranties from the builder only apply to residential building work. There are no statutory warranties that run with the property for non-residential building work. Further, builders, architects, engineers, designers and building certifiers/surveyors typically do not owe subsequent owners of non-residential buildings a common law duty of care in tort in respect pure economic loss arising from building defects.
Accordingly, the imposition on “building practitioners” of a statutory duty to exercise reasonable care will represent a significant development in the law, to the extent that it is owed to subsequent owners of non-residential buildings.
The NSW Government’s statement that the benefit of the duty will extend beyond subsequent residential homeowners to “unsophisticated development clients” - also described in the NSW Government response as “unsophisticated construction clients who are small businesses” - indicates an intention that the duty will apply beyond residential building work, to some non-residential building work. However, it is unclear whether the benefit of the duty will “run with the property” and therefore be made available to subsequent owners of non-residential buildings.
The NSW Government response also makes it clear that the reform will only apply to building work that is covered by the National Construction Code, so the vast majority of civil construction work will not be covered.
Why are most subsequent building owners presently without a legal remedy?
The loss that a building owner suffers when a building has been designed or constructed defectively typically comprises:
deminuition in the value of the building;
rectification costs; and/or
additional operating or maintenance costs.
The law in Australia calls these forms of loss “pure economic loss”, because they are not consequent on any damage to the building owner’s existing property, or any personal injury to the building owner. The fact that the building defects sometimes manifest in cracks or other physical damage to the newly constructed building does not change their characterisation under Australian law as pure economic loss.
As you would expect, a person who engages a builder to design and construct a building will typically have a contractual right to sue the the builder for any loss it suffers as a result of deficiencies in the builder’s work, including pure economic loss. Similarly, a person who engages an engineer, architect or building certifier to design or certify a building or part of it will have a contractual right to sue the engineer, architect or certifier for any loss that it suffers due to a failure by the engineer, architect or certifier to exercise due care and skill. In both cases, it is the contract that provides the building owner with its legal remedy.
But the legal position of a subsequent owner of the building, who acquires the building from the original owner, is different. The subsequent owner is typically not a party to the contract between the original owner and the builder, engineer, architect or building certifier. Accordingly, the subsequent owner - which includes the owners’ corporation in respect of common property in a strata title building - can’t bring a claim for breach of the contract. Often, the only basis on which it can bring a claim is under the law of tort, for negligence.
The problem for the subsequent building owner is that the law of tort seeks to contain the liability of wrongdoers for pure economic loss because to do otherwise would give rise to indeterminate liability - people would become liable for “an indeterminate amount, for an indeterminate time to an indeterminate class”, for a failure to take reasonable care.
While the law of tort will hold you liable for financial loss due to property damage or personal injury that is a “reasonably foreseeable” consequence of your failure to take reasonable care, it requires more than reasonable foreseeability to make you liable for pure economic loss.
Defining exactly what “more” is required has proven to be an elusive quest for Australia’s highest court - its approach continually evolves as new factual circumstances come before it for a decision. The current approach focuses on the concept of vulnerability, in terms of the claimant’s inability to take steps to protect itself from the risk of loss.
But just when a subsequent owner will be considered sufficiently vulnerable to a building practitioner’s conduct, to impose a duty on the building practitioner to take reasonable care to avoid causing pure economic loss, is uncertain.
It’s uncertain because there are many “salient features” of the relationship between the subsequent owner and the building practitioner that need to be taken into account, including the degree of reliance by the subsequent owner on the skill and care of the building practitioner, and (imputed) knowledge by the building practitioner of that reliance; the extent to which contractual arrangements between the building practitioner and the original owner limit the building practitioner’s liability to the original owner for a failure to exercise reasonable care; and the degree of control that the building practitioner could exercise to avoid the loss.
The trend in recent court decisions concerning defective building claims by subsequent building owners has been a gradual shrinking of the class of subsequent purchasers that are considered to be sufficiently vulnerable. The trend has been for the court to determine that the subsequent purchaser could have protected itself by:
engaging a building inspector to inspect the building for those defects that can be discovered from a reasonable inspection (without invasive or destructive testing);
obtaining contractual warranties from the seller of the property that the property is free from all defects, or at least latent defects (i.e defects that are undiscoverable without invasive or destructive testing; and/or
obtaining an assignment of the contractual rights that the seller has against parties involved in the design, engineering, construction or certification of the building.
The only exception has been for purchasers of residential homes, intended to be used as the purchaser’s principal dwelling, that are generally unaware of the need for, and don’t know how to obtain, warranties from the seller regarding latent defects. But many purchasers of residential properties, including those that do so for investment purposes, are aware of the need to take steps to protect themselves against the risk of the building being defective, and so wouldn’t be considered sufficiently vulnerable to have a claim in tort against those involved in the building’s design, engineering, construction or certification.
Accordingly, without legislative intervention, most subsequent purchasers will find themselves without a legal remedy for pure economic loss against those involved in the design, engineering, construction or certification of the building that have failed to exercise reasonable care.
The need for any reform of the law concerning to liability for defective building work to occur via legislation, as opposed to a decision of the courts, has also been identified by the High Court.
Residential building legislation
Most Australian states and territories have already recognised the need for, and have provided homeowners with, a legislative remedy against builders in respect of building defects.
This has generally been achieved by residential building legislation that:
imposes statutory warranties into every contract to undertake residential building work, that the work will be done with due care and skill, and will be fit for its intended purpose; and
makes these statutory warranties “run with the property”, so that the benefit of the warranties is available to subsequent purchasers who did not enter into the contract.
But these statutory warranties only apply to residential building work (as variously defined in each state and territory). There are no statutory warranties that run with the property for non-residential building work.
Further, the warranties that are imposed in respect of residential building work are only imposed on builders (and others that carry out residential building work). They are not imposed on architects, engineers, designers, draftspersons or others involved in the design or engineering of residential buildings. Nor are they imposed on building certifiers/surveyors.
Accordingly, a further legislative solution is needed in order to give subsequent building owners a legal remedy against:
those involved in the design, engineering, construction or certification of non-residential buildings; or
those involved in the design, engineering or certification of residential buildings that don’t owe a common law duty of care in tort to subsequent owners in respect of pure economic loss.
New statutory duty of care on building practitioners
The NSW Government’s response to the Shergold and Weir Report indicates a desire to provide a further legislative solution.
The response states:
"The NSW Government will ensure that building practitioners owe a common law duty of care to owners’ corporations and subsequent residential homeowners, as well as unsophisticated development clients."
Accordingly, it appears the a further legislative solution will:
take the form of a statutory duty on “building practitioners” to exercise reasonable care in performing their work; and
be available to owners’ corporations, subsequent residential homeowners and “unsophisticated construction clients who are small businesses”.
Based on the Sherwood and Weir report, a building practitioner will likely include each of the following:
Builder
Site or Project Manager
Building Surveyor
Building Inspector
Architect
Engineer
Designer/Draftsperson
Plumber
Fire Safety Practitioner.
Further, the statement in the response that the benefit of the duty will extend beyond subsequent residential homeowners to “unsophisticated development clients” -- also described in the response as “unsophisticated construction clients who are small businesses” -- indicates an intention that the duty will apply beyond residential building work, to some non-residential building work. Whether the benefit of the duty will “run with the property”, and therefore be made available to subsequent owners, is not clear.
To the extent that it does, this will represent a significant and welcome reform to the law concerning the rights of subsequent building owners in respect of building defects.
