Builders' duty of care for defective works continues to narrow

In brief 6 min read

A recent UK decision¹ continues the judicial trend of limiting the circumstances in which a builder will be liable in negligence for pure economic loss caused by its defective works. It emphasises the importance for principals/developers (and subsequent purchasers) to maximise contractual protections against such loss.

How does this affect you?

• Given the terms commonly found in construction contracts and sale contracts between commercial entities, it is unlikely that, at least in the context of commercial properties, a property owner/developer or a subsequent purchaser of the property will be considered to have the requisite element of vulnerability so as to establish a claim in negligence against a builder to recover rectification costs for defective works (absent actual property damage or personal injury).
• Accordingly, such parties will need to rely on other legal avenues, such as claims in contract, misrepresentation under section 18 of the Australian Consumer Law and any applicable statutory warranty scheme.

The UK position

In the United Kingdom, pure economic loss is ordinarily irrecoverable in the tort of negligence. Where the loss suffered by a building owner from a building defect is only:

• the cost of rectifying the defect to prevent damage to person or property occurring; or
• diminution in the building value,

such loss is generally considered to be pure economic loss and therefore irrecoverable in negligence.

However, obiter dictum by Lord Bridge in Murphy v Brentwood District Council² had opened the possibility for liability in negligence for the cost of rectifying a 'dangerous defect' which may be a potential source of personal injury or property damage to third parties. Subsequent decisions of the UK High Court have been divided as to whether this qualification reflected the correct position at law³.

Recent decision of Thomas v Taylor Wimpey Developments

In this case, property owners brought a claim in negligence against their builder in relation to defective log retaining walls at the rear of the property.

The court found that the builder owed no duty of care in tort in respect of the cost of rectifying the walls, as this was regarded as pure economic loss. Further, the court expressly rejected the earlier obiter dictum by Lord Bridge in Murphy v Brentwood which suggested a duty of care may arise in circumstances where the defect represented a danger to third parties. In reaching this view, the court considered that such qualification was not consistent with the present state of the law, which recognised no other basis for liability for pure economic loss in negligence other than an assumption of responsibility. The court also considered that there was no compelling policy justification for the qualification, as builders responsible for defects that pose risks to personal injury would be liable under either contract or the Defective Premises Act 1972 (UK).

The property owners had also brought claims against the builder for misrepresentation and for breach of statutory duty, but these claims were held to be time barred.

The Australian position

Similar to the UK, Australian courts have drawn a distinction in the tort of negligence between liability for personal injury or property damage, and liability for pure economic loss. Traditionally, given the nature of our capitalist society and the potentially indeterminate nature of the loss, the courts have sought to limit the circumstances at common law in which a person has a positive duty of care not to cause pure economic loss to another.

The general rule of common law is that:

• damages for economic loss which are not consequential upon personal injury or property damage, are not recoverable in negligence, even if the loss is foreseeable⁴; and
• defect rectification costs to prevent damage or diminution in a building's value are economic loss.

Exceptions have been recognised. Those exceptions commonly, but not necessarily, involve an identified element of known reliance or dependence on the part of the plaintiff, or the assumption of responsibility by the defendant, or a combination of the two⁵. Uncertainty exists as to the precise scope and application of the exceptions.

Trend to limit exceptions – a focus on 'vulnerability'

In Bryan v Maloney⁶, a builder constructed a house with inadequate footings, the defects of which did not manifest until the owner sold the house to the plaintiff. The High Court found the builder owed the subsequent purchaser of the house a common law duty to take reasonable care in the construction of the house to avoid diminution in its value. Fundamental to this decision was the classification of the relationship between the builder and the original owner as being of the kind involving an assumption of responsibility on the part of the builder and known reliance on the part of the owner. This arose, in part, from the lack of specific and detailed provisions in the design and construct contract as to the quality of design and construction and any limitation on liability.

In Perre v Apand Pty Ltd⁷, the High Court further considered the appropriate test for a duty of care not to cause economic loss. In that case, the appellants (who were potato farmers) suffered economic loss as a result of their farm being in a region affected by an importation ban following the negligent introduction by the respondent of a disease onto another farm in the region. In holding that the respondent owed the appellants a duty of care to protect them from economic loss, the High Court was influenced by the 'vulnerability' of the appellants. In this context, the notion of 'vulnerability' referred to the appellants' inability to take reasonable steps to protect themselves from the consequences of the respondent's want of reasonable care (eg by way of suitable contract terms). The High Court adopted 'vulnerability' in place of 'proximity' as a key ingredient in establishing a duty of care.

This concept of 'vulnerability' being a prerequisite for a duty of care to avoid economic loss was adopted in the subsequent case of Woolcock Street Investments⁸. In Woolcock's case, the majority of the High Court held that an engineer who designed the foundations of a warehouse and office complex did not owe a subsequent purchaser of the building a common law duty of care to avoid economic loss. Key to this decision was the finding that there had been neither reliance by the original owner on the engineer, nor an assumption of responsibility by the engineer. As such, the plaintiff lacked the element of 'vulnerability' considered to be held by the plaintiff in the earlier building defect case of Bryan v Maloney.

This trend continued in Brookfield Multiplex⁹, where the High Court found that a builder neither owed a common law duty of care to the developer nor the subsequent strata title owner corporation of a strata-titled serviced apartments, to avoid economic loss for latent defects which had not caused any damage to person or property. Given the contractual protections available to the developer (in its contract with the builder) and the subsequent purchasers (in their contracts with the developer), there was not the requisite element of 'vulnerability' nor an assumption of responsibility by the builder to protect against economic loss.