Australia: Direct contracts with consultants and sub-contractors essential

Last Updated: 20 November 2011
Article by Keith Bethlehem and Bianca Slabacu

In brief – Owner not relevantly "vulnerable", so claims fail

CJD Equipment's failed claim against consulting and structural engineers demonstrates the need for owners and developers to form direct contracts with consultants and sub-contractors as early as possible.

Owner denied recourse against structural engineers

In the case of CJD Equipment Pty Limited v A&C Constructions Pty Limited & Ors [2011] NSWCA 188, the Court of Appeal has upheld a judgment in which the owner of a distressed building, CJD Equipment, was denied recourse against the structural engineers that designed the works. CJD, a significant private company described as the country's biggest independent supplier of new construction equipment, was held not to be relevantly "vulnerable", so that the consultant engineers with whom CJD had no direct contractual relationship owed no duty of care.

Recourse could only be taken against the builder with whom the owner had a direct contractual relationship. The Court of Appeal also addressed the question of whether CJD had acted reasonably in failing to take steps to mitigate its loss. The court dismissed the appeal, albeit allowing a small increase in damages to account for losses suffered by the proprietor prior to the duty to mitigate taking effect.

Contract for design and construction of commercial premises

The plaintiff, CJD, contracted with the first defendant, A&C Constructions, for the design and construction of a commercial premises at a site in the south west of Sydney known as Smeaton Grange.

CJD's business involved the import, sale and service of heavy earthmoving and construction machinery. It was alleged that the performance of the contract for the construction of new premises, particularly a large concrete slab on which the machinery would move and be serviced, required not only compliance with the Building Code of Australia, but also consideration of the weight requirements of the machinery when creating the design and carrying out the construction at the premises.

Alleged non-adherence to weight specifications

CJD submitted that the appropriate weight specifications had not been adhered to, so that several years following construction, the weight of the machinery caused movement in the concrete slabs at the premises and cracking within a curtain wall which had been erected.

Further, it was alleged that the concrete slabs were inadequate because the joints were not sealed to prevent the entry of moisture.

Various works subcontracted 

During the course of the performance of the contract, A&C had subcontracted various works, including for the provision of design and supply of steel framing and the services of two structural engineers, those parties being the third to fifth defendants to the proceedings.

Apportionment defences were raised between those parties as to who was in fact liable for the ultimate claim that the property was not fit to be used for the purpose for which it was intended.

Concrete slabs not as thick as recommended initially 

Evidence given throughout the course of the trial was to the effect that the initial consulting engineer retained to design the drainage and re-grading works provided specifications to CJD that the reinforced concrete slabs were to be of a certain thickness.

Due to apparent cost saving measures, CJD repeatedly refused to authorise the works to be carried out to those specifications and only agreed when over the course of some six months, a subsequent engineer provided a lesser specification for the concrete thickness, being practically half of that initially recommended.

Claim for economic loss, not physical damage

The court below formed the view that the claim was one for pure economic loss. In making this finding, it relied on the leading High Court authority of Woolcock Street Investments1. It was found in Woolcock that where damage is alleged to have been suffered as a result of the purchase of a defective building, or in this case, its construction, the claim is one for economic loss.

According to Hugh J, the rationale is that although physical damage could manifest itself in cracking or other problems, where the loss is caused by faulty construction which does not cause injury to a person or property, it is one for "economic loss, not physical damage." The relevant loss is the loss of value.

Was the plaintiff relevantly "vulnerable"?

The trial judge held that in ascertaining whether a duty of care to avoid economic loss arose on the part of the defendants, one of the predominant (although not exclusive) considerations is the so-called vulnerability of the plaintiff, CJD Equipment.

Vulnerability is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cause the consequences of loss on the defendant2.

Here, CJD was not held to be relevantly "vulnerable", as it was aware that A&C would be required to engage subcontractors to perform certain works relating to the design and construction, yet chose only to contract with A&C. It did not ask any one of the third to fifth defendants to undertake any obligation to CJD.

Furthermore, it maintained an overall control, evidenced by its involvement to a substantial degree in the design process, by requiring on more than one occasion that the concrete thickness be reduced, apparently with a view to limiting its construction costs.

Owners of commercial buildings can try to avoid losses

Woolcock is authority for the proposition that "first owners and purchasers of commercial buildings are ordinarily in a position to protect themselves from most losses that are likely to occur from defects in the construction of such buildings", including by means of entering into contractual arrangements for warranties as to fitness for purpose, or obtaining such warranties from others connected with the construction, such as the other defendants.

CJD chose not to take those steps. The most telling factor in terms of any suggested vulnerability to CJD was its failure to appoint any superintendent to oversee the works to ensure their quality.

Owner solely responsible for thickness of concrete slabs

On appeal, CJD challenged the finding that the initial consulting engineer had warned against the reduced thickness of the concrete slab and had in fact provided a letter declining any liability arising from a refusal to adhere to its initial concrete thickness specification.

Further, CJD challenged the finding that it had failed to take reasonable steps to mitigate its loss and sought that damages be assessed or reassessed. A&C Constructions cross appealed, seeking a reduction in the damages awarded for failure to construct the works in accordance with the Building Code of Australia.

The Court of Appeal accepted that in forming the view that CJD was solely responsible for the thickness of the concrete slabs as constructed, the trial judge had relied on objectively established facts, contemporaneous materials and the apparent logic of events3.

Mitigation – Proprietor should have rectified defects early

In apportioning damages as between the builder and the proprietor (85:15), the trial judge held that even though A&C Constructions was not responsible for the design element of the works, it ought to have known of the defects and taken steps to address those.

Insofar as mitigation, a reasonable inference could be made that if CJD had taken steps to perform the recommended works when the design defects were brought to its attention in 2005, it would not have been necessary to replace the curtain wall.

There was no independent evidence as to the damages caused by the proprietor's failure to mitigate, nor was there any suggestion that doubts as to the cause of the distress in the curtain wall would have affected the steps that ought to have been taken to rectify the damage.

As such, the Court of Appeal refused to disturb the trial judge's finding on CJD's unreasonable failure to mitigate its loss.

The question which then arose was whether the onus of the defendant extended to establishing how much of the ultimate loss could have been avoided. The court held that it could not be said that although the proprietor had failed to mitigate its loss, it ought recover nothing.

It ought still recover any losses suffered up to the time in which its losses could have been mitigated. In this case, the proprietor could have saved the cost of replacing the curtain wall in 2009, by spending $12,500 in rectification costs in 2005.

The court therefore increased the proprietor's award of damages by $10,626, being 85% of the $12,500 rectification cost. This was scant consolation for CJD, which had amended its claim shortly before trial to seek $6.38 million and failed (with costs consequences) against four of the five defendants.

Owners and developers need direct contracts as early as possible

The decision upholds and clarifies the existing authorities on criteria for consideration in classifying a claim as one for pure economic loss and the indicia for determining whether a duty to avoid pure economic loss arises.

It also distinguishes between damages which ought be allowed because they were occasioned prior to the duty to mitigate taking effect, from those losses arising as a result of the failure to mitigate, which damages ought not be recoverable.

Most significantly, the case stands as a stark warning to sophisticated owners and developers.

The courts require you to ensure that contractual arrangements with consultants and sub-contractors are entered into at the earliest possible time to establish direct duties. Otherwise you face the prospect of having no recourse against, for example, consultant engineers at a later date when defects emerge.

The owner in this case was left not only with a badly compromised property, it now also faces millions in legal costs - both its own and those of the three engineering consultants who the court held owed it no duty of care.

Declaration of interest: CBP Lawyers acted for Peter Marcus Consulting Engineers Pty Ltd, the third respondent to the appeal.

For more information about insurance and reinsurance, please see the website of CBP Lawyers or contact Keith Bethlehem at or Bianca Slabacu at


1Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; 216 CLR 515; 205 ALR 522; 78 ALJR 628 (1 April 2004)

2Woolcock Street Investments v CDG Pty Ltd [2004] HCA 16. Additional factors to be considered in establishing the existence of the duty of care were enunciated in Perre v Apand Pty Ltd (1999) to include, amongst other things, autonomy and control.

3 Fox v Percy [2003] HCA 22. 214CLE118

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Keith Bethlehem
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