Are you really vulnerable? Check your contract terms before building, or buying, residential property

In all Australian States Territories except Western Australia, newly constructed residential buildings are subject to statutory warranties that run with the property.

As such, and subject to relevant limitation periods (which do vary significantly across Australia), where a subsequent owner of such a property discovers a defect, they are able to claim against the builder to recover the costs of rectification, despite there being no contractual relationship between them.

But what about where parties, other than the builder, have caused or contributed to the defects? In that case, the subsequent owner may need to pursue those other parties in negligence. This requires the claimant to establish that they were “vulnerable” to such negligence, in the sense of being unable to take steps to protect themselves from the harm.

However, a recent decision of the New South Wales Court of Appeal in Ku-ring-gai Council v Chan [2017] NSWCA 226 strongly hints that the statutory warranties imposed under the Home Building Act 1989 (NSW) can negate vulnerability, making claims in negligence against other building professionals difficult to prove.

The facts:

Mr Acres and his wife (the Owner-Builders) renovated their house at Wahroonga in New South Wales.  During the renovations, the Owner-Builders engaged an Engineer to prepare and certify the engineering drawings and inspect the works (Engineer).  Ku-ring-gai Council (Council), was also appointed to certify the alteration works under the relevant planning legislation as (amongst other things) suitable for occupation and compliant with the approved plans and specifications, and to undertake a ‘pre-occupation’ inspection.

On the completion of the works, Council inspected the works and issued the builder with the occupation certificate.  However, Council failed to identify certain structural defects and instances of non-compliance with the approved plans and specifications.

Some years later, the Owner-Builders sold the house to Ms Chan and Mr Cox (the Purchasers). The occupation certificate issued by the Council was attached to the contract of sale.  The Purchasers later discovered the defects.

The decision:

The Purchasers sued the Owner-Builders and the Engineer for the cost of rectification. The Owner-Builder in turn sought indemnity from the Engineer and the Council, alleging that they had been negligent. The trial judge found that:

  • the Owner-Builder was liable for the cost of rectification as he had breached warranties under the Home Building Act 1989 (NSW);
  • the Council was liable to indemnify the Owner-Builder in respect of the Owner’s claim against it because Council, in its capacity as certifier, failed to identify defects in the building; and
  • the Engineer did not owe the Owner-Builder a duty of care to prevent economic harm.

The appeal by Council:

The Council successfully appealed to the NSWCA and overturned the trial judge’s finding that it was liable to indemnify the Owner-Builder.

The NSWCA held that the Owner-Builder did not suffer loss because of Council’s failings in issuing the occupation certificate – Council was not required to supervise the building work, and so even if the Council had not issued the certificate, the structural defects (which were the fault of the Owner-Builder) would have still existed on the sale to the Purchasers.

Acting Justice of Appeal Sackville also confirmed that it was “extremely important, if not necessary” for the Purchasers to show that they were vulnerable in order to succeed in a claim in negligence, and went on to find that the Purchasers were not vulnerable because they:

  • were protected by the statutory warranties given in accordance with the Home Building Act 1989 (NSW), and by the Owner-Builders’ compulsory insurance policy; and
  • could have sought protection by way of appropriate terms in the contract for sale with the Owner-Builder (including the price payable for the property).

As such, he said that the Purchasers were not vulnerable to the negligence of the Council and there could be no duty of care.

Lessons for Tasmania and Victoria

Because there are statutory warranties for residential dwellings under similar legislation in Tasmania and Victoria, the reasoning in this case is likely to be applicable outside of NSW.

As such, the case should be a relief for certifying authorities and building surveyors (and their insurers), who had previously been heavily exposed to claims in negligence by subsequent purchasers.  However, the reasoning in the case may also benefit other building consultants such as engineers and architects in certain circumstances.

(To view the case, please click here.)

If you have any queries or would like further information, please contact:

Brett Cassidy
M: 0438 368 053

Joe Mullavey
M: 0416 794 061

Published: 9 February 2018

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