January 28, 2015
2014 provided some important judicial clarification regarding professional liability in Australia.
In October the High Court revisited liability for pure economic loss and particularly the duty of a builder or engineer to subsequent purchasers in the Brookfield Multiplex Case.
The claim was for “the diminished value of the building and the loss of rent during rectification”. In examining whether there had been any particular vulnerability of the ultimate owner in respect of the alleged latent defects, the court looked at the provisions of the original design and construct contract and the contract of sale and the sophisticated protections provided in those documents. His Honour, the Chief Justice observed that, in Woolcock Street Investments:
“(t)here was no allegation of any assumption of responsibility by the engineering company or of known reliance by the prior owner. There was no duty of care to the prior owner.”
Hayne and Kiefel JJ observed:
“It is enough to notice that the relevant parties made contracts for the construction of the building and for the subsequent sale of parts of the building which were contracts that could (and did) make provisions regulating the quality of what was to be received in return for payment of the price. The making of those contracts denies vulnerability.”
“Nor does the conclusion about absence of vulnerability depend upon detailed analysis of the particular content of the contracts the parties made.”
Crennan, Bell and Keane JJ expressly adopted the following passage from Stanley Burton LJ in Robinson v PE Jones (Contractors) Ltd:
“The crucial distinction is between a person who supplies something which is defective and a person who supplies something (whether a building, goods or a service) which, because of its defects, causes loss or damage to something else...
I do not think that a client has a cause of action in tort against his negligent accountant or solicitor simply because the accountant’s or solicitor’s advice is incorrect (and therefore worth less than the fee paid by the client). The client does have a cause of action in tort if the advice is relied upon by the client with the result that his assets are diminished.”
In answering questions posed by the parties the NSW CA had held that the appellant owed the respondent a duty:
“To exercise reasonable care in the construction of the building to avoid causing the (respondent) to suffer loss resulting from latent defects in the common property vested in the (respondent), which effects:
(a) Were structural; or
(b) Constituted a danger to persons or property in, or in the vicinity of, the serviced apartments, or
(c) Made those apartments uninhabitable.”
In rejecting this duty Crennan, Bell and Keane JJ observed:
“…the expanded liability for economic loss established by Hedley Byrne and Co Ltd v. Heller & Partners Ltd depended upon proof of the fact of assumption of responsibility by a person giving advice to another, and that other having relied upon the advice.
It is of critical importance to appreciate that the loss for which the respondent seeks damages is the expense which it is obliged to incur as a result of the emergence of latent defects after its acquisition of the common property. It was common ground that this expense is properly understood as a species of economic loss as distinct from damage to its property.”
They went on to observe that a distinction between this case and Bryan v Maloney because that case involved a dwelling house rather than a commercial building (the often cited basis for confirming the application of Bryan v. Maloney) had not been suggested as material by either party.
“That is understandable, given that the distinction between purchases of buildings for domestic and commercial purposes is an unstable one (at least in the absence of statutory definition), because its application means that liability is apt to come and go depending on the use intended for a building by its successive purchasers.”
They adopted McHugh J’s passage from Woolcock Street Investments:
“A commercial building is constructed or bought because it is perceived to be a suitable vehicle for investment… (N)o prudent purchaser would contemplate buying a building without determining whether it has existing or potential construction defects. Knowledge of its defects, actual or potential, is central to any evaluation of its worth as an investment. In so far as risk are uncertain or unknown, the prudent purchaser will factor the risk into the price or obtain contractual protections or, if necessary, walk away from the negotiations.”
These Judges acknowledged a departure in Australia from the law in Canada and New Zealand but consistency with the UK and “the preponderance of judicial authority in the US.”