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Limelight Articles

Limelight 02/18

Is a duty of care owed by a principal certifying authority to prospective purchasers? – Update

Authors, Paul Kozub , Charu Stevenson

Ku-ring-gai Council v Chan [2017] NSWCA 226

Chan & Anor v Ku-ring-gai Council & Ors [2018] HCASL 21

Introduction

On 15 February 2018, the High Court dismissed an Application for Special Leave to appeal the NSW Court of Appeal judgement in Ku-ring-gai Council v Chan [2017] NSWCA 226.

This decision confirms that the role of a principal certifying authority (PCA) in issuing an occupation certificate does not extend to certifying that the building work does not, or is not likely to, contain latent defects or that the works comply with the relevant plans or the conditions of the development consent.

Background

In 2008, Mr Acres undertook to construct an extension to a residential property (Property) as an owner-builder (Construction).  For the Construction, he retained:

  • Ku-ring-gai Council (Council) as the PCA; and
  • Mitchell Howes Civil & Structural Engineers Pty Ltd (Engineer) to prepare structural drawings and inspect the structural works.

The Council issued an occupation certificate even though the Construction was structurally defective and did not comply with the Engineer’s drawings or the approved plans.

Ms Chan and Mr Cox (Claimants) inspected the Property in 2010 and obtained a pre-purchase building report prepared on the basis of a visual inspection only. Following this, the Claimants purchased the Property, after which the structural defects manifested.

The Claimants sued Mr Acres for a breach of the statutory warranties, and the Council and the Engineer for breaches of their duty of care.

First Instance Decision

Justice McDougall of the NSW Supreme Court dismissed the claim against the Engineer on the grounds that the Engineer did not owe the Claimants a duty of care.

In contrast, his Honour found that the Council owed the Claimants a duty of care as:

  • the Claimants relied on the Council to exercise care in issuing the final occupation certificate; and
  • the Council knew of the likelihood of reliance by prospective purchasers and therefore assumed responsibility to prospective purchasers of certifying accurately.

His Honour concluded that the Council breached this duty of care in issuing the certificate and also found that the Council was obliged to indemnify Mr Acres.

Court of Appeal Decision

The NSW Court of Appeal (Meagher JA with the principal judgment; McColl JA and Sackville AJA agreeing) unanimously allowed the appeal.

Meagher JA stated that the Claimants needed to establish vulnerability for a duty of care to be owed, defining “vulnerability” as an inability to protect oneself from the consequences of a defendant’s want of care. His Honour found that the Claimants had not established vulnerability as:

  • there was no actual reliance by the Claimants on the certification by the Council;
  • an occupation certificate does not, in its terms or effect, certify that:
  • building work does not, or is not likely to, contain latent defects (whether structural or otherwise); or
  • that the works comply with the relevant plans and specifications or the conditions of the development consent;
  • critical stage inspections are undertaken by a PCA for the purpose of satisfying that an occupation certificate may be issued and, although the records of those inspections have to be made and kept, there is no requirement that those records be made available to the person having the benefit or the development consent or the builder carrying out the work;
  • responsibility for ensuring that building work is undertaken in accordance with the conditions of the development consent falls upon the owner or other person having benefit of it. The function of a PCA is regulatory, as it is required to be satisfied about matters directed to authorising the occupation and use of the completed building in accordance with its Building Code of Australia classification; and
  • the Claimants had the benefit of statutory warranties and remained able to protect themselves by negotiating the terms of purchase.

Meagher JA concluded that the Council was not liable to indemnify Mr Acres as it had not undertaken to supervise compliance as part of its retainer and that, in any event, Mr Acres did not suffer any loss as a result of any want of care in issuing the occupation certificate as, even if the Council had not issued the certificate, the structural defects would have existed.

The Claimants applied for Special Leave to Appeal to the High Court

High Court – Special Leave Determination

The High Court dismissed the Special Leave Application with costs on the grounds that “an appeal to this Court would not enjoy sufficient prospects of success to warrant the grant of special leave”, implicitly approving of the NSW Court of Appeal judgement

Implications

The NSW Court of Appeal decision confirms that PCAs are not responsible for certifying that building works do not, or are not likely to, contain latent defects or that the works comply with the relevant plans or the conditions of the development consent. This narrows the scope of claims that can be brought against PCAs for economic loss caused by building defects.

However, it is important to note that the NSW Court of Appeal drew a distinction between the principles that apply to determining if a duty exists to avoid pure economic loss, on the one hand, and a duty to avoid physical injury, on the other.  Although the Court did not set out the principles that would apply in circumstances of a physical injury, Meagher JA implied that these principles would be less onerous on claimants as the certification requirements are primarily aimed at the safety of those occupying and using a new building.

Gilchrist Connell acted for the successful Engineer.

Date: 22 February 2018

This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.