Developers, principals, bodies corporate, off-the-plan buyers, neighbours, local council – the list of potential plaintiffs who might be affected by a building project is extensive.
But what about later owners? That is, people with whom you have no immediate relationship, no contract and, in truth, you don’t know who they are or whether they will even exist. Can these phantoms of Christmas future pursue you in court if they want to?
Over the decades, Australian courts have identified several policy arguments against judgment in favour of such a plaintiff.
For example, has the plaintiff merely been the victim of their own lack of commercial business sense?
Did they have other means to protect themselves from the loss, such as contractual risk allocation or insurance?
Competition is not illegal, nor is pricing appropriately to reflect any included warranties or the lack. Plaintiffs who fail to strike a good bargain, and seek the court’s assistance to retrospectively make them good, don’t get a lot of sympathy.
Risk for Builders of Residential Dwellings
Have builders been found liable to later owners of property? Yes. Yes they have.
The starting point for a long time was from the 1995 decision in a case called Bryan v Maloney.
There, a builder was careless in the construction of the foundations of a residential building. A subsequent purchaser sought damages for the costs of repairing the foundations, as well as associated damage to the fabric of the house.
The court found the builder owed the subsequent purchaser a duty of care as to the quality of the work of the house. The main reason was that the assumption of responsibility and known reliance of the purchaser on the skill of the builder.
There were really two crucial points:
- the relationship between the subsequent purchaser and the builder was almost identical to that between the first owner and the builder (they relied on the builder and did not have the skill background to make the necessary checks on the foundation); and
- the nature of the transaction was unsophisticated. The later owner could not be expected to have negotiated a warranty over the quality of work.
The question then becomes: what about buildings with a commercial flavour, rather than a residential one?
Risk of Subsequent Buyers in a Commercial Setting
If the big issue in Bryan was that the purchaser was vulnerable (they were not sophisticated and had no real ability to protect themselves), then what about when that isn’t the case?
In Woolcock Street Investments Pty Ltd v CDG Pty Ltd, a case over a commercial property, the most important factor when deciding the vulnerability of the plaintiff was held to be its ability to protect itself by negotiating a warranty over the quality of the work. In McHugh J’s judgment, he said:
It is true that Woolcock made no investigation or inquiries concerning defects or potential defects in the building that it bought and obtained no warranties in respect of them. But its failure to take reasonable steps that were open to it {to protect itself from economic loss} is not a ground for holding that the respondents owed it a duty to take care in respect of pure economic losses arising from the defects in the foundations of the building. No doubt if Woolcock had insisted on contractual protection from its vendor, it may have had to pay a higher price for the building. But that only shows that, in this area, contract rather than tort is a better, more just and probably more efficient way of dealing with the problem of pure economic losses arising from defective construction. The price of a commercial building almost invariably reflects the inherent and other risks – including the risk of latent defects – of buying the building.
A further issue here was that the original builder didn’t actually owe the original owner a duty that applied to the foundations – the owner had refused to pay for geotech reports. This was crucial in Bryan because the duty of care the builder owed to the first owner was more or less transplanted onto the subsequent owner. As a result, its absence here, combined with the plaintiff’s lack of vulnerability, made it impossible for a duty of care to arise.
So where does that leave us? The Courts have held that a vulnerable subsequent purchaser may have a claim against the original builder.
They have also found that a later commercial purchaser, with a chance to protect itself through the contract, is less likely to be vulnerable and therefore less likely to have an associated claim.
These principles were affirmed by the High Court in 2014 in another commercial building case, Brookfield Multiplex Ltd v Owners Corporation. There, particular emphasis was placed on the comprehensive nature of the contracts, and the effect this had on any duty of care:
In the present case, the liability of the appellant to the developer was the subject of detailed provisions relating to the risk of latent defects in the appellant’s work … They set out the extent of the appellant’s obligations … To supplement them with an obligation to take reasonable care to avoid a reasonably foreseeable economic loss to the developer in having to make good the consequences of latent defects caused by the appellant’s defective work would be to alter the allocation of risks effected by the parties’ contract.
So, again, the Court allows parties to contract as they see fit regarding the allocation of risk, and absent special circumstances is not going to interfere with what well advised parties have agreed to.
Statutory regulations
Despite the difficulties faced by plaintiffs who seek to impose a duty of care on a builder or council, specific laws now reduce the need to rely on the law of negligence in some situations.
For example, a subsequent owner of a domestic building now, by statute in most states and territories, has the same rights for a breach of warranty as the original owner.
Those laws are now in place in all jurisdictions except Western Australia and the Northern Territory. However, it only relates to domestic building contracts which, under the Queensland Building and Construction Commission Act 1991 (Qld), means a contract for the construction, renovation, or removal of a detached dwelling, or home.
So, if you are in the domestic dwelling space you should ensure that your pricing and your insurance are in line with this potential for later liability.
Conclusion
Overall, the courts are largely unsympathetic to imprudent subsequent purchasers, particularly in a commercial setting.
The courts expect parties who are committing to such a large investment to put in the time and effort to inspect and check the property, negotiate a fair price in light of any defects, request inspections from the local council, and negotiate their contracts to include warranties if necessary.
Contractors should be careful with their contract process to ensure that they know of, and account for, any longer term liability that might be included for subsequent purchasers. To the extent possible, the contract can also be used as a vessel to limit those rights and minimise your risk as the builder.
