Builders' liability to subsequent purchasers

In 1979 the builder (Bryan), who was the appellant at the High Court and the defendant in the first hearing, built a house for his sister-in-law, Mrs Manion. It was an ordinary commercial transaction. There was no suggestion that the builder was asked to do a cheap job. Mrs Manion sold the house to a couple who in turn sold it in 1986 to the owner and respondent, Mrs Maloney.

The owner inspected the house three times before buying it. She looked for cracks but did not see any. She did not know who had built the house and did not ask. About six months after the owner bought the house cracks started to appear. They became quite extensive and it was proved that they were due to footings which were inadequate to withstand the seasonal changes in the clay soil under the house.

There was no contract between the owner and the builder, so the owner sued for negligence. The owner was awarded approximately $34,500 by a single Judge of the Tasmanian Supreme Court; an amount sufficient to remedy the inadequate footings and consequential damage to the house. The builder's appeal to the Full Court of the Supreme Court of Tasmania was dismissed and from there he appealed to the High Court.

For the High Court hearing the parties agreed that:

• the builder was negligent in building the house with inadequate footings
• the damage was 'economic loss' alone, a term of great legal significance
• the measure of damages should be the cost of repair
• the damage was sustained when the inadequacy of the footings first became manifest, that is, when the first cracks appeared
• the damage was a foreseeable consequence of the builder's negligence

The only issue for the court to decide was whether the builder owed the owner a duty of care. The appeal to the High Court was heard by five judges. Four dismissed the appeal and one, Brennan J, delivered a compelling dissenting judgment. The first judgment was delivered by Mason CJ, Deane J and Gaudron J who said that the question was:

… whether, under the law of negligence, a professional builder who constructs a house for the then owner … owes a … duty to a subsequent owner of the house to exercise reasonable care to avoid the kind of foreseeable damage which [the owner] sustained … that is … the diminution in value of a house when a latent and previously unknown defect in its footing or structure first becomes manifest. (Ultramares Corporation v Touche [1931] 74 NE 441 at 444)

The significance of the loss being purely economic is that courts have been reluctant to allow such plaintiffs to succeed, whereas plaintiffs are frequently successful where economic loss is accompanied by physical injury or damage to property other than the building which has been purchased. The much quoted reason is that courts wish to avoid imposing upon defendants liability 'in an indeterminate amount for an indeterminate time to an indeterminate class'.

In cases such as this where the question is whether a duty of care existed, the court will consider whether there exists 'a relationship of proximity between the parties with respect to both the relevant class of act or omission and the relevant kind of damage'. (Mason CJ, Deane J and Gaudron J [1995] 128 ALR 163 at 165) The use of the expression 'proximity' tends to confuse rather to clarify. In the words of Brennan J in his dissenting judgment:

[It is] my opinion that to treat proximity as a criterion of liability without … [a] … definition of the elements it contains is to create a judicial discretion. (1995, 128 ALR 163 at 191)

Such a notion of (discretionary) proximity would be a juristic black hole into which particular criteria and rules would collapse, and from which no illumination of principle would emerge. (1995, 128 ALR 163 at 192)

Two frequently applied criteria for determining whether there is proximity in economic loss cases are whether the plaintiff 'relied' upon the action or advice of the defendant and whether the defendant assumed responsibility for the risk. This was certainly not the case in this matter as the owner did not even know who the builder was when she bought the house. Mason CJ, Deane J and Gaudron J said that these elements are common but not necessary. They also said it is settled law that it is possible for obligations in contract and tort to co-exist and added that in some cases the existence of a contract, either between the parties or involving a third party, will favour proximity and in other cases it will militate against it. For example, if the builder's task is limited, it may indicate that responsibility lies elsewhere for a problem outside that task. This was not the case here. The contract was cost plus, with no limitation of the builder's obligations.

The three judges said that the factors indicating proximity were:

• the house itself – a permanent structure to be used indefinitely and possibly the most significant investment that an owner will make
• foreseeability by the builder of such a house that inadequate footings are likely to cause economic loss to the person who owns the house when the damage becomes manifest
• no intervening cause, whether negligent or otherwise, which comes between the builder's failure and the owner's loss

On the question of whether the fact that the loss was purely economic made a difference, the three judges said that:

• allowing a subsequent owner to succeed would not open up claims against builders 'in an indeterminate amount ... to an indeterminate class'
• it was readily foreseeable that a failure of the footings would cause damage to the person who owned the house at the time that damage became manifest
• 'In the ordinary circumstances, the builder of a house undertakes the responsibility of erecting a structure on the basis that its footings are adequate to support it for a period during which it is likely that there will be one or more subsequent owners' (1995, 128 ALR 163 at 172)
• subsequent owners are likely to have less opportunity to check the adequacy of footings than those for whom buildings are built and are unlikely to be skilled in building matters
• builders should be aware that subsequent owners are likely to assume that the building has been properly built

The three judges spoke with approval of a judgement of Lord Denning (Dutton v Bognor Regis Urban District Council, [1972] 1 QB 373 at 396 mentioned at (1995) 128 ALR 163 at 173) and said that there is no rule of principle, policy or common sense which makes a builder liable for physical injury, but not for the cost of remedial work necessary to prevent it. They acknowledged that their decision is contrary to a number of recent decisions of the House of Lords, including Murphy v Brentwood District Council (1991, 1 AC 398).

This case represents a significant development in the law of torts, but is probably not the last word. Mason CJ, Deane J and Gaudron J finished their judgment with a comment on the applicability of their decision. They said that it was important that the building in question was built to be used as a permanent dwelling house and added 'the decision in this case is not directly decisive of … whether … proximity exists in other categories of case or as regards other kinds of damage'. (1995, 128 ALR 163 at 174)

Comment

As Brennan J, the dissenting Judge, said, 'proximity' lacks a clear definition. The power of courts to use 'proximity' as a discretion for judicial law making is unfortunate. In the words of Brennan J '… the law of negligence should be capable of application in solicitor's offices. It should not have to await definition in litigation'. (1995, 128 ALR 163 at 191)

It is almost impossible to believe that reactive soil problems would take seven years to appear in a place as wet as Tasmania, but no mention of this was made in any of the High Court judgments. The case was not 'statute barred' (a defence available to the plaintiff when the limitation period has expired under the Tasmania Limitation Act 1974) because time did not start to run until the damage appeared.