Australia: Limelight Issue No. 74: PCAs and building defects in NSW

Introduction

On 7 September 2017, the NSW Court of Appeal unanimously held in Ku-ring-gai Council v Chan [2017] NSWCA 226 that a principal certifying authority (PCA) did not owe a duty of care to avoid pure economic loss to prospective purchasers of a property when issuing an occupying certificate.

This decision confirms that the role of PCAs in issuing occupation certificates does not extend to certifying that the building work does not, or is not likely to, contain latent defects or that the works comply with the relevant plans or the conditions of the development consent.

Background

Mr Acres owned a residential property in Wahroonga (Property). In 2008, he undertook to construct an extension to the Property as an owner-builder (Construction). For the Construction, he retained:

  • Ku-ring-gai Council (Council) as the PCA under the Environmental Planning and Assessment Act 1979 (NSW); and
  • Mitchell Howes Civil & Structural Engineers Pty Ltd (Engineer) to prepare structural drawings and inspect the structural works.

It was common ground that the Construction was structurally defective and did not comply with either the Engineer's drawings or the approved plans. Despite this, the Council issued an occupation certificate to Mr Acres.

Ms Chan and Mr Cox (Claimants) inspected the Property in 2010 and obtained a pre-purchase building report from a building expert, which was expressly qualified as having been prepared on the basis of a visual inspection only.

The Claimants purchased the Property in 2010, after which the structural defects in the Property manifested. It was also common ground that a visual inspection prior to purchase could not have discovered the structural defects in the Construction.

The Claimants sued Mr Acres for a breach of the statutory warranties contained in the Home Building Act 1989 (NSW), and the Council and the Engineer for breaches of their duty of care.

First Instance Decision

Justice McDougall of the NSW Supreme Court noted that, as the claim was for pure economic loss, foreseeability of that loss was insufficient to establish a duty of care. His Honour stated that the Claimants needed to establish vulnerability and that reliance by a claimant on the conduct of a defendant, and assumption of responsibility by a defendant, are factors that can be taken into account in determining vulnerability.

His Honour dismissed the claim against the Engineer on the grounds that the Engineer did not owe the Claimants a duty of care as the Claimants had not established that they relied on the Engineer or that the Engineer had assumed responsibility to the Claimants in undertaking the inspections.

In contrast, his Honour found that:

  • the Claimants relied on the Council to exercise care in issuing the final occupation certificate; and
  • the Council knew of the likelihood of reliance by prospective purchasers and therefore assumed responsibility to prospective purchasers of certifying accurately.

His Honour concluded that the Council owed the Claimants a duty of care in undertaking its inspections and issuing the final occupation certificate and breached this duty of care in issuing the certificate despite the existence of the defects resulting in economic loss to the Claimants.

His Honour also found that the Council was obliged to indemnify Mr Acres for the economic loss caused by its negligence in issuing the final occupation certificate.

The Council appealed on whether it owed a duty of care to the Claimants and whether it was obliged to indemnify Mr Acres.

Appeal

The Court of Appeal (Meagher JA with the principal judgment; McColl JA and Sackville AJA agreeing) unanimously allowed the appeal.

Meagher JA agreed with Justice McDougall's comments that the Claimants needed to establish vulnerability, which he defined as an inability to protect oneself from the consequences of the defendant's want of care; however, Meagher JA found that the Claimants had not established vulnerability as:

  • there was no actual reliance by the Claimants on the certification by the Council;
  • an occupation certificate does not in its terms or effect certify that building work does not, or is not likely to, contain latent defects (whether structural or otherwise) or that the works comply with the relevant plans and specifications or the conditions of the development consent;
  • critical stage inspections are undertaken by a PCA for the purpose of satisfying that an occupation certificate may be issued and, although the records of those inspections have to be made and kept, there is no requirement that those records be made available to the person having the benefit or the development consent or the builder carrying out the work;
  • responsibility for ensuring that building work is undertaken in accordance with the conditions of the development consent falls upon the owner or other person having benefit of it. The function of a PCA is regulatory as it is required to be satisfied about matters directed to authorising the occupation and use of the completed building in accordance with its Building Code of Australia classification, and to ensuring that the protections provided by the Home Building Act to owners and subsequent purchasers are available if residential building work is involved; and
  • the Claimants had the benefit of statutory warranties and remained able to protect themselves by negotiating the terms of purchase.

Meagher JA concluded that the Council was not liable to indemnify Mr Acres as it had not undertaken to supervise compliance as part of its retainer and that, in any event, Mr Acres did not suffer any loss as a result of any want of care in issuing the occupation certificate as, even if the Council had not issued the certificate, the structural defects would have existed.

Implications

This decision confirms that PCAs are not responsible for certifying that building works do not, or are not likely to, contain latent defects or that the works comply with the relevant plans or the conditions of the development consent. This narrows the scope of claims that can be brought against PCAs for economic loss caused by building defects.

However, it is important to note that the Court of Appeal drew a distinction between the principles that apply to determining if a duty exists to avoid pure economic loss, on the one hand, and a duty to avoid physical injury, on the other. Although the Court did not set out the principles that would apply in circumstances of a physical injury, Meagher JA implied that these principles would be less onerous on claimants as the certification requirements in the Environmental Planning and Assessment Act are primarily aimed at the safety of those occupying and using a new building.

Gilchrist Connell acted for the successful Engineer.

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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