The NSW Court of Appeal decision in Makawe Pty Limited v Randwick City Council  NSWCA 412 confirms that in cases of a novel relationship, the duty of care is to be determined according to a 'salient features' test. The decision also deals with the question of what constitutes pure economic loss and raises the possibility of a new interpretation of section 44 of the Civil Liability Act 2002 (NSW).
- A duty of care is unlikely to be imposed where there is no connection between the parties.
- In such cases, a 'salient features' test is to be employed.
- Structural defects in construction causing economic loss with nothing more is mere economic loss.
In 1995, Randwick City Council (Council) approved a development application to construct a three-storey residential apartment building comprised of 18 studio apartments and a basement car park which would sit three metres below ground level. The following year, the developer applied for and was granted a building application by the Council. At the time of this second approval, the Council was in possession of a report by geotechnical experts revealing that the car park was situated at almost the same level as the local water table and would be at risk of flooding as the table rose and fell.
Construction was completed at the end of 1996, with no imposition by the Council of any condition of consent relating to the level of the car park. Subsequently in 1997, the building was sold to Makawe Pty Limited (Makawe) and the apartments were let to tenants. Just under a year later, the car park flooded, causing minor damage such as staining to the walls and floor.
Makawe sued the Council for the cost of installing a flood mitigation system which, they asserted, should have been a condition of the Council's original approval. At first instance, the trial judge found that the Council owed no duty to Makawe.
Issues on appeal
The issues before the Court of Appeal were first, whether the trial judge erred in finding the loss suffered by Makawe to be purely economic loss rather than mere property damage and, second, whether his Honour erred in finding the Council did not owe Makawe a duty of care. The Court acknowledged that when determining the existence of a duty of care, one must 'bear in mind the type of damage...the defendant [allegedly] had a duty to take reasonable care to avoid'. The characterisation of the loss as pure economic loss bore heavily on the primary and appeal decisions.
The Court of Appeal consulted the decisions of the High Court in Bryan v Maloney  HCA 17 and Woolcock Street Investments Pty Limited v CDG Pty Limited  HCA 16 (Woolcock). In Bryan v Maloney, inadequate footings in a residential house caused subsequent cracking of the structure. This was held not to be consequent upon physical injury or damage to property and was classified as mere economic loss. The Court of Appeal found no distinction between that case and the present one. Also, in Woolcock where a commercial building suffered stress due to defective construction, it was held that there was no personal or property damage going beyond simple diminution of an improvement.
The Court unanimously followed Woolcock and found the claim here was properly characterised as economic loss suffered due to defects in construction. Since Australian courts have been largely unwilling to allow claims for pure economic loss, the Court of Appeal stayed the course and noted that a pure economic loss element would not favour a finding of duty.
Duty of Care
Importantly, the Court of Appeal decided there was no duty of care owed by the Council to Makawe. Since the Council was removed from Makawe in so far as there was no direct relationship between them, the Court agreed with the trial judge that this was a novel relationship to be determined based on its 'salient features' as elucidated in the recent decision of the same Court in Caltex Refineries (Queensland) Pty Limited v Stavar  NSWCA 258. However, Justice Hodgson found that the trial judge had erred in two ways: first, in finding that an absence of vulnerability was determinative and second, that there must have been actual reliance. His Honour noted that pursuant to the decisions of Sutherland Shire Council v Heyman  HCA 41 and Pyrenees Shire Council v Day  HCA 3 it is not necessarily actual reliance that is important but 'foreseeability or knowledge of that reliance by the defendant that is significant for the purposes of a duty of care'.
Nonetheless, these errors were not enough to impose a duty. The 'salient features' test, although 'quite finely balanced', revealed that the first seven of these features – foreseeability and nature of the harm; control and assumption of responsibility by Council; vulnerability and reliance of Makawe; and the physical, temporal and relational proximity of both parties – were both applicable and central to the outcome of this case. Justice Simpson noted that the trial judge was correct not to take into account public policy considerations which would be only neutral to the test.
Civil Liability Act 2002, section 44
Although the matter was decided in favour of the Council based on an absence of a duty of care, the Court considered the Council's defence based on section 44 of the Civil Liability Act 2002 (NSW) (CLA).
Section 44 provides an authority is not liable for failure to exercise regulatory functions. At trial, this ground was dismissed and, indeed, was made redundant in light of the trial judge's findings. However, the Court of Appeal noted that section 44 was not defined and could be read in one of two ways: first, that the word 'function' applies to an authority's broad power to grant applications; second, that the word applies also to discrete functions such as imposing conditions on grants of development applications. The interpretation depends on a reading of section 41 of the CLA, which 'includes a power, authority or duty'. The question was left unanswered, though merits the attention of public authorities.
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