Certifiably improved: The impact of Ku-ring-gai Council v Chan [2017] NSWCA 226 on the liability of certifiers to subsequent owners

A recent decision of the New South Wales Court of Appeal has provided a welcome result for certifiers facing claims for pure economic loss following the issuing of occupation certificates.

For years it has seemed that:

• If you build it, they will come;
• If you certify it, they will come; and
• If you insure it, well… they will absolutely come.

While cornfields and Kevin Costner may be conspicuously absent from Ku Ring Gai*, those whispered ghostly words are certainly relevant to this recent New South Wales Court of Appeal decision.

Background

Despite lingering in the construction outfield (performing a few cursory critical stage inspections and issuing occupation certificates), certifiers have long been soft targets when it comes to breach of duty claims.

Why? Well, that can largely be traced to mandatory insurance requirements under the Building Professionals Act 2005 (NSW) and the Building Professionals Regulation 2007 (NSW). As a result, some insurers have declined to offer coverage to certifiers, considering the risk too high; an unwelcome position if ever there was one.

That position was not helped by the first instance decision of Justice McDougall in Chan v Acres,¹ in which Ku Ring Gai Council (Council), in its capacity as principal certifying authority, was found liable to subsequent purchasers (Purchasers) of an owner built property for failing to carry out critical stage inspections in a proper and workmanlike manner. In a classic double play, the certifier was also liable to indemnify the owner builder, Mr Acres, for his own liability to the Purchasers for the structural defects.

But it wasn’t to be a home run for the Purchasers…

Facts

Council was engaged as principal certifying authority by Mr Acres, an owner builder who had effected significant renovations and extensions to a property which he owned at Wahroonga.

The terms of the Council’s engagement were simply that it would:

• Perform critical stage instructions; and
• Issue a final occupation certificate confirming the property was suitable for occupation and use in accordance with its classification under the Building Code of Australia.

The engagement did not extend to the issuing of a compliance certificate.

Following completion and the issuing of an occupation certificate, Mr Acres sold the property to the Purchasers, who had sight both of the occupation certificate and a pre-purchase report which described the property as average, with a potential need for repairs and maintenance.

Post purchase, it became apparent that there were serious structural issues with the property and that it did not comply with consents and plans. None of these issues had, however, been identified by the Council, which subsequently admitted it had dropped the ball. Despite the concession, Council argued it did not owe a duty of care to the Purchasers.

First instance

Justice McDougall accepted that because this was a case for pure economic loss, foreseeability of loss alone would be insufficient to establish a duty of care.²

His Honour was, nevertheless, prepared to find that the Council did owe a duty of care here. In doing so, His Honour held that the Purchasers had relied on the Council to exercise care in issuing the final occupation certificate, Council was aware of that reliance and that it could be taken to have assumed the responsibility of certifying accurately. His Honour was also prepared to find that that reliance made the purchasers vulnerable to the Council’s actions.

Council called foul ball and appealed the decision.

Appeal

The chief issue on appeal was whether the Council, as principal certifying authority, owed the purchaser of residential premises a duty to take reasonable care in the issue of an occupation certificate to avoid their suffering economic loss as a result of the previous owner builder’s defective work.

In assessing whether there is a duty of care to avoid pure economic loss, the Court made the following points:

• The relevant features of a claim for pure economic loss are foreseeability of harm, reliance and assumption of responsibility and vulnerability;
• The significance of these factors will depend on the circumstances in which the duty is said to arise;³ and
• In some cases the absence of vulnerability may be determinative against the existence of a duty – that is to say, the plaintiff must be able to show that it was unable to protect itself.⁴

In this case the Purchasers had not run arguments of actual reliance on the occupation certificate or any statement in it. Further, it was noted that the role of a final occupation certificate is to show suitability of a building for occupation and use and this “does not require that all of the building work which is the subject of the development consent has been carried out in accordance with approved plans and specifications, and in a proper and workmanlike manner.”⁵

The Court was not prepared to entertain any arguments that the Purchasers were vulnerable to Mr Acres or the Council, as they were able to avail themselves of statutory warranties and insurances under the Home Building Act 1989 (NSW)⁶. Additionally, it was open to the Purchasers to protect themselves through the negotiation of sale price and terms.

The Purchasers’ case for economic loss accordingly failed for want of reliance, assumption of responsibility and vulnerability.

Conclusion

While mandatory insurance has historically brought economic loss claims by subsequent purchasers directly to certifiers, it appears that position will be certifiably improved as claims will fail where no vulnerability or reliance on the certifier’s occupation certificate can be shown.

Certifiers (and their insurers) should for now then be able to enjoy a well deserved reprieve in the dugout (pending any High Court appeal).

*A Google search reveals that there are in fact baseball fields (plural) within the Ku Ring Gai Council area.

This article was written by Beth O’Connor, Solicitor and Andrew Miers, Partner.

¹[2015] NSWSC 1885
²Chan v Acres [2015] NSWSC 1885 at [94], [97]
³Meagher JJA at [68]
⁴Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 (2014) 254 CLR 185 at [51]
⁵Meagher JJA at [83]
⁶See Section 18B for statutory warranties for residential work and Part 6 for Home Warranty Insurance (specifically section 101 for owner builders)