In 1995, the High Court in Bryan v Maloney [1] held that a builder in Tasmania was liable in negligence to compensate a plaintiff for economic loss she had suffered in purchasing a house, which was discovered to have defective foundations. The house had been built by the defendant for a third party unrelated to the plaintiff, some seven years earlier.
As the limitation period for negligence actions in these circumstances does not begin running until the defects become (or should have become) apparent,[2] the judgment arguably had the effect of imposing a time-unlimited, automatically transferrable warranty on residential builders to rectify “latent defects” in dwelling house construction, regardless of who owned the house when the defects became apparent, and of when they occurred.[3]
In a very cost-competitive industry, Bryan has been much-despised by builders. The High Court, with masterly understatement, drily observed that “… Bryan v Maloney has not escaped criticism.” [4]
Nevertheless, since Bryan, two further subsequent-owner negligence cases have been decided by the High Court, at roughly 10-year intervals; Woolcock St Investments Pty Ltd v CDG Pty Ltd,[5] and Brookfield Multiplex v Owner’s Corporation Strata Plan No 61288.[6] The three cases were decided by (almost) entirely differently comprised benches, [7] yet neither of the later cases overturned Bryan. They did however confine the authority of it, and the introduction of transferrable statutory warranties has reduced the need to rely on it. Whilst today “water-cooler” discussion often involves suggestions that Bryan is no longer of significance, Brookfield confirmed it is still authority which is relevant to (at least) latent foundation defects in dwelling houses,[8] and that a builder’s liability in negligence to subsequent building owners for pure economic loss cannot be ignored as an issue, even for non-residential construction.
At the same time, the reasoning in these three cases, and particularly that in Brookfield, suggests provisions which could be considered for inclusion in construction contracts to limit builders’ future liability to subsequent owners as far as possible. Some possible terms are outlined below. In my respectful opinion, terms such as these would more directly engage Brookfield and earlier reasoning than the equivalent terms appearing in a number of relevant standard construction contracts.
A caveat
This article discusses principles emerging from these cases that may assist builders. There are other important factors relevant to these types of actions which cannot be affected by proactive contractual provisions, and which are therefore not addressed. In particular, the “vulnerability” of a subsequent owner (a measure of its ability to protect itself against the risk of pure economic loss due to latent defects, say by proper investigation/inspection of the property, or by negotiating contractual protection), [9] while definitely still relevant to a builder’s liability to subsequent owners, is not discussed in depth as it is a characteristic of unknown third parties and therefore beyond a builder’s control.
Brookfield Multiplex – a way forward?
In Brookfield, the court found that no duty of care to prevent pure economic loss was owed by a builder to an Owners’ Corporation (a subsequent owner) in circumstances where both the building contract with the original owner (the developer, Chelsea) and the on-sale contract to individual owners (represented by the Owners’ Corporation) clearly set out the rights of the owners to have defects repaired.
In what may be viewed as a landmark judgment for builders (“the Joint Judgment”), Crennan, Bell, and Keane JJ set out two important principles.
Firstly, they held that parties to a contract are free to negotiate the risks and warranties inherent in an arrangement without fear of those agreed positions being superseded or replaced by tortious duties. This confirmed the primacy of the law of contract over the law of tort:
“The common law has not developed with a view to altering the allocation of economic risks between parties to a contract by supplementing or supplanting the terms of the contract by duties imposed by the law of tort…[10] 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… 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.”[11]
Secondly, they held that the extent of the duty to the original owner places a limit on what duty can be owed to subsequent owners:
“To impose upon a defendant builder a greater liability to a disappointed purchaser than to the party for whom the building was made and by whom the defendant was paid for its work would reduce the common law to incoherence…”.[12]
The other judges in Brookfield were either more equivocal about both these principles, or did not comment on them.
In relation to the first principle, French CJ, and in a joint judgment Hayne and Kiefel JJ, all specifically declined to make judgments on the proper provinces of the laws of contract and tort.[13] Gageler J did not comment on the point. Nevertheless, in Bryan, Brennan J (as he then was, in dissent) had supported this principle,[14] and the plurality in Bryan had accepted that the contract can affect the existence of a duty of care to the original owner.[15] Elsewhere, they accepted that contractual exclusions or limitations will trump tortious liability.[16] The joint judges in Woolcock St arguably also accepted that contract can affect tortious liability, whilst not relying on any such effect for their decision.[17]
In relation to the second principle, while not going as far as the Joint Judgment, French CJ did accept the importance of the duty owed to the original owner in assessing whether a duty was owed to a subsequent purchaser.[18] Further, Hayne and Kiefel JJ held (perhaps implicitly) that a disconformity in duty could deny the existence of a duty of care to subsequent owners.[19] Nevertheless, an equivalence between the two duties was accepted in both Woolcock St and Brookfield as having been an essential step in the reasoning of the majority in Bryan. [20] The Joint Judgment’s incoherence argument was also perhaps presaged and supported by the reasoning of Brennan J in Bryan (although Brennan J proceeded from the viewpoint of the subsequent purchaser rather than the builder).[21]
The Joint Judgment therefore appears to reflect a growing judicial emphasis on the duty owed to the original purchaser, and so a very clear, negotiated contractual allocation of risk seems an extremely sensible measure for attempting to limit future liability. It may, depending on judicial development and specific facts, result in no duty of care being found to a subsequent owner – even if that subsequent owner is “vulnerable”.
Suggested contract terms
To this end then, a “Contractual Allocation of Risk, and Limitation of Liability” heading could be considered, with a term limiting the builder’s post-completion duty to rectifying defects within the warranty period, and excluding liability at any time for any other damages or losses including consequential losses, whether brought in contract, tort, or otherwise. The term could make clear that the builder will have no liability to rectify or compensate for defects, whether patent or latent, beyond the warranty period (this will, in the case of a regulated domestic building contract in Queensland, have to be a minimum of 6 years (possibly plus 6 months) for structural defects, and one year for non-structural defects[22]). It could further state that the post completion warranty and exclusion of liability (and thus, logically, the duty owed to the original owner) have been discussed and negotiated, and that this negotiated contractual allocation of risk was an important factor in setting the contract price agreed by the parties.
To further emphasise the negotiated nature of these provisions, consideration could be given to offering, for a price, optional warranty extensions which would cover both patent and latent defects for a longer period, with the options chosen noted and separately initialled.
Such terms would appear to engage the main thrust of the Joint Judgment, but perhaps even more could be done, particularly for domestic builders. For example, given that the scale of residential projects does not typically support a full-time supervisor on site, the risk to a residential builder that a defect could be incorporated into the job whilst no supervisor is present is not insignificant. That risk could also be negotiated and contractually allocated, by offering, for a price, supervision “upgrades”, so that the client is made aware that this service costs money and that more money can be spent by them to lessen risk of defects. The same could be done for site investigation.
In addition to contractually allocating risks, the suggested provisions also arguably weigh against any notion of excessive assumption of responsibility by the builder, as discussed in Woolcock St,[23] and indeed in Bryan itself.[24] If clients choose to save money by limiting their warranty and/or selecting the lesser services, the assumption of responsibility by the builder, and the resulting standard of care to which it might be held, should arguably be lower than it might otherwise be.[25]
Conclusion
In an industry in which clients are content to commission minimal-cost construction of houses under a subcontract system which often involves limited on-site supervision and slim margins, the effective imposition of a time-unlimited warranty on builders appears unfairly onerous. Whilst Parliament in Queensland has legislated a 6-year structural warranty as an appropriate warranty period for domestic construction,[26] it unfortunately did not rule out actions in negligence beyond that time.[27]
Builders are entitled to minimise their exposure to long-term negligence claims, and some measures they can take which may assist have been discussed. However, these are measures that can only be taken at contract time. Once a building contract has been signed, no further opportunities along these lines are available.[28] Although “vulnerability” of subsequent owners is still uncontrolled and uncontrollable, Kirby J’s observation from 2004 is relevant still today: “…the law on this subject remains in a state of active development.”[29] There appears to be a noticeable trend of High Court jurisprudence towards the primacy of contractual risk allocation over rights in tort, and it may develop further – but as it can only be engaged up front, now is the time to act.
In a residential context, the options suggested could be positioned as an optional additional service, one not offered by competitors – a chance to upgrade quality (through increased supervision and more reliable foundations), and a chance to extend a warranty.
Commercial contracts, whilst probably safe from direct Bryan authority, will also more easily engage Brookfield and Woolcock St reasoning if similar terms are included. These two later “pro-builder” cases will often be factually distinguishable, so it seems prudent to take all steps possible in all types of construction contracts, not just contracts for domestic dwellings.
Although contractual provisions cannot directly protect builders in Queensland against decisions to issue “Directions to Rectify” by the Queensland Building and Construction Commission,[30] they could also be relevant to those decisions,[31] and to reviews of such decisions.[32]
Disclaimer: This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Specific legal advice should be sought for particular circumstances. No responsibility is taken for any reliance on this article. Inclusion of contractual terms along the lines suggested should not be viewed as guaranteeing immunity from a successful action, nor a definite increase in prospects of success.
My liability is limited by a scheme approved under Professional Standards Legislation.
A version of this article appeared in the February 2019 edition of Proctor, the magazine of the Queensland Law Society.
© Harry Knowlman 2018
[1] Bryan v Maloney (1995) 182 CLR 609.
[2] See Hawkins v Clayton (1988) 164 CLR 539.
[3] See arguments raised by P. A. Keane QC (as he then was) in Woolcock St Investments Pty Ltd v CDG Pty Ltd 216 CLR 515 at 521: “the Court is here asked to create what is in effect a transmissible warranty of quality of indefinite duration in respect of commercial buildings” – which is exactly what the High Court imposed in respect of residential dwellings in Bryan. In fact Brennan J (as he then was, in dissent) did raise this effectively indefinite warranty as a policy concern in Bryan itself (at 644), a concern accepted and shared by Callinan J in Woolcock St (at 587, [209]).
[4] Woolcock St, at 528 [16] (Gleeson CJ, Gummow, Hayne, Heydon JJ). In the same case Callinan J opined at [211] “There is… reason to question the correctness of Bryan v Maloney itself”.
[5] Woolcock St Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515: by a margin of 6 to 1, the High Court found that no duty of care to prevent economic loss was owed by engineers who had designed a commercial building, to a subsequent purchaser.
[6] Brookfield Multiplex v Owner’s Corporation Strata Plan No 61288 (2014) 254 CLR 185: Seven High Court judges unanimously found that no duty of care to prevent pure economic loss was owed by a builder to an Owners’ Corporation (a subsequent owner).
[7] Hayne J sat in both Woolcock St, and Brookfield Multiplex.
[8] See, for example, Tracey and Anor v Olindaridge Pty Ltd and ors [2014] QCAT 617, involving a first (not subsequent) owner, in which breach of contract and statutory warranty claims were time-barred, but, citing Bryan v Maloney, a duty of care nevertheless founded a claim in negligence.
[9] Typically, purchasers of domestic dwellings have been viewed by the courts as “vulnerable”, and of commercial properties, as “not vulnerable”. However, that distinction is not a “bright line”.
[10] Brookfield at [132], citing, inter alia, Hill v Van Erp (1997) 188 CLR 159 at 179, 223, 231-234.
[11] Brookfield at [144].
[12] Brookfield at [69] (Crennan, Bell, and Keane JJ, citing Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 at 532 [28], also citing Woollahra Municipal Council v Sved (1996) 40 NSWLR 101 at 120).
[13] Brookfield, at [36] and [59] respectively.
[14] Bryan, Brennan J, at 643: “The doing of work for reward is a matter governed by the agreement between the party doing the work and the party requesting that the work be done. They fix their own rights and liabilities on issues of purely economic significance. The work to be performed, the quality and value of that work and the cost of repairing defects in work ill-done are thus properly the concerns of the law of contract.”.
[15] Bryan, Mason CJ, Deane and Gaudron JJ at 621: “. In other circumstances, the contents of a contract may … even exclude the existence of, a relevant duty of care.”. See also Toohey J at 665.
[16] Bryan, Mason CJ, Deane and Gaudron JJ at 622, citing with approval Central Trust Co. v. Rafuse (1986) 2 S.C.R., at 204-205: “A concurrent or alternative liability in tort will not be admitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort.”
[17] Woolcock St at [28]: “There would be evident difficulty in holding that the respondents owed the appellant a duty of care to avoid economic loss to a subsequent owner if performance of that duty would have required the respondents to do more or different work than the contract with the original owner required or permitted”.
[18] Brookfield, at [28] (French CJ): “There is no reason to regard the existence, or non-existence, of an anterior duty of care to a prior owner as more than an important factor relevant to the existence of a duty of care in respect of pure economic loss to a subsequent purchaser.”.
[19] Brookfield, at [60] (Hayne & Kiefel JJ): “As in Woolcock Street, it is not necessary to decide in this case whether disconformity between the obligations owed to the original owner under the contract and the duty of care allegedly owed to the subsequent owner would necessarily deny the existence of that duty.” (emphasis added, footnotes omitted).
[20] Woolcock St at 527, [14] – [15] (Gleeson CJ, Gummow, Hayne and Heydon JJ), referring to Bryan: “… the decision in the case depended upon the anterior step of concluding that the builder owed the first owner a duty of care to avoid economic loss of that kind… Most importantly, they depended upon equating the responsibilities which the builder owed to the first owner with those owed to a subsequent owner.”. See also Brookfield at [28] (French CJ, different wording) and at [60] (Hayne & Kiefel JJ): “The absence of disconformity was an essential step in the reasoning in Bryan v Maloney”.
[21] Bryan, at 641 (Brennan J): “If the financial interests of the remote purchaser were to be protected by the law of negligence rather than by the law of contract, those interests could be affected by the scope of the building contract to which the purchaser was not a party. In the present case, e.g., it would have been critical to determine whether Mrs. Manion [the original client, for whom the house was built] gave Mr. Bryan authority to commission – and was willing to pay for – the soils investigation that would have revealed the presence of reactive clays”(square brackets added).
[22] See Queensland Building and Construction Commission Act 1991 (Qld), schedule 1B, part 3, section 29 – statutory warranty period for structural defects is six years, or six years and six months for defects becoming apparent in the final six months of the six-year period.
[23] Woolcock St, at 532 [26] (Gleeson CJ, Gummow, Hayne and Heydon JJ).
[24] Bryan, at 627 (Mason CJ, Deane & Gaudron JJ)
[25] Woolcock St at 531-2, [25]-[26]: Gleeson CJ, Gummow, Hayne, and Heydon JJ held that, since the first owner in Woolcock St had, on the basis of economic considerations, issued directions to the engineer not to conduct a site investigation, no assumption of responsibility by the engineers existed, and thus the existence of a duty of care to a subsequent owner was not supported by Bryan reasoning. However, ultimately the reason no duty was found by the joint judges was that the plaintiff was not relevantly “vulnerable”.
[26] see Queensland Building and Construction Commission Act 1991 (Qld) (QBCCA), schedule 1B, section 29.
[27] See Tracey and Anor v Olindaridge Pty Ltd and ors [2014] QCAT 617.
[28] The contract could of course be varied by agreement after signing.
[29] Woolcock St at 582, [190].
[30] Under s 72 QBCCA.
[31] S 72(3) QBCCA.
[32] Internal and external reviews are available under Part 7, Division 3 QBCCA.