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The High Court held that a professional that gave advice on construction or design of a building owes a duty of care and is therefore liable for 'pure' economic loss in tort. The liability is not simply to the original owners but flows to subsequent purchasers.
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Case law
CDG Pty Ltd, a consulting firm of engineers, designed footings for a warehouse and offices in Townsville for a property trust (vendor). The completed building was subsequently sold to the appellant, Woolcock Street Investments Pty Ltd.
The contract of sale did not include a warranty from defect, nor an assignment of the vendor's rights as original owner to recover from others in relation to any defects.
More than a year after the purchase the building was showing signs of 'substantial structural distress' due to the settlement of the footings, or material below the footings, or both.
CDG Pty Ltd had advised the vendor to obtain soil tests to allow them to provide their advice.
The vendor refused to obtain such tests and told them to use the structural footing sizes provided by the contractor.
Liability for negligence: pure financial loss
The Woolcock Streets Investments v CDG Pty Ltd case is significant because it removes the artificial distinction between liability for professionals advising on residential dwellings and professionals advising on commercial buildings. The High Court held that the type of building is not the critical issue.
More relevant is the nature of the relationship between the professional giving advice and the owner, and whether the subsequent purchaser of the property retains this relationship.
Development of the law
Case law - Bryan v Maloney
In the previous leading case in this area, Bryan v Maloney (1995, 182 CLR 609) the High Court considered a similar issue in relation to a residential building. It held the subsequent purchaser could recover against the contractor for pure economic loss when the fabric of a house cracked due to inadequate footings.
The High Court found the reliance on the contractor by the owner and the assumption of responsibility of the contractor created a 'relationship of proximity' and therefore 'a consequent duty of care exists in respect of pure economic loss'.
The High Court held that there were four criteria in establishing whether such a 'relationship of proximity' exists:
- A 'connecting link' between the contractor and the owner (in this case the house), a permanent structure, and a significant investment.
- It was foreseeable that economic loss would likely result from negligent construction of the house.
- No other person's negligence or event interfered in the chain of causation.
- Similarities between the relationship of the first owner with the contractor and the subsequent owner.
Therefore, the basis of the relationship between the first owner and the contractor is critical. In Bryan v Maloney, the contract did not limit liability at all, and did not preclude the existence of a duty of care to avoid the type of pure financial loss ultimately suffered by the subsequent owner.
In subsequent judgements by lower courts, a practice emerged of not allowing recovery in cases concerning commercial buildings, emphasising that the facts in Bryan v Maloney dealt with a residential dwelling.
Case law - Woolcock Streets Investments v CDG Pty Ltd
In Woolcock Streets Investments v CDG Pty Ltd (2004, HCA 16), the High Court confirmed that it was the nature of the relationship between the professional giving advice, and the owner's reliance on that advice that was more critical. The majority criticised an approach which emphasised the type, or use, of building over the nature of the relationship.
The court said that the principles of Bryan v Maloney (above) depended upon considerations of assumption of responsibility, reliance and proximity. Most importantly, they depended upon equating the responsibilities which the builder owed to the first owner with those owed to a subsequent owner. Refer Acumen note Builders' liability to subsequent purchasers.
The High Court held that the relationship between the vendor and the contractor in Woolcock Streets Investments v CDG Pty Ltd was not similar to the relationship in Bryan v Maloney, but not because of the type of building, rather because the relationship between the respondents and the original owner of the land was, therefore, not one in which the owner entrusted the design of the building to a builder, or in this case the engineer, under a simple 'not detailed' contract. It was a relationship in which the original owner asserted control over the investigations which the engineer undertook for the purposes of performing its work.
The High Court referred to five criteria which would be used to assess whether such a relationship existed:
- Reasonable foreseeability of loss
- Indeterminacy of liability
- Autonomy of the individual
- Vulnerability to risk
- Knowledge of the risk and its magnitude
The High Court has clarified the principles used to assess whether a duty of care exists between a professional and a subsequent purchaser for pure economic loss. More importantly, professionals can now restructure their contracts accordingly to limit any liability of this nature.
Failing to clarify instructions with a client may also lead to a finding of negligence. Alternatively, a finding of a breach of a retainer may be made against a firm, if the client’s design requirements are not met.
Case law - Christian Education Ministries Qld Ltd v Thomson Adsett Pty Ltd
In Christian Education Ministries Qld Ltd v Thomson Adsett Pty Ltd [2015] QDC 292, the District Court of Queensland found that:
- the school instructed architects to design for a ‘full sized basketball court’
- there was limited documentary evidence but the plans had a handwritten notation ‘full sized basketball court’
- there were conflicting comments after the brief was issued and by different persons about the size of the basketball court, but these did not supersede the formal instructions
- the architects did not clarify the instructions issued
- by failing to produce a design that complied with the instructions they were given, the architects were negligent and breached their retainer. The Court also concluded that if it had not made a finding of negligence, a breach of the retainer agreement could apply.
Implications
The scope of a retainer should be clarified in writing if there are ambiguities, otherwise the conflict may be determined by a judge forming a view as to whose evidence is to be preferred.
A further difficulty is that in the law of torts, the damage arises when it first manifests. This may be 15 years into the life of a building. So actions to recover pure financial loss may commence well outside the normal period within which an action could commence. Therefore keeping records of design, construction and structural advice for a longer period than the statutory six years would be wise. Refer Acumen note Document retention and destruction. Note that in Victoria, liability in a building action is limited to manifestation of damage within 10 years of issue of a Certificate of Occupancy.
Disclaimer
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