Moorabool Shire Council v Taitapanui [2004] VSC 239

Supreme Court of Victoria|2004-07-01|Before: SMITH J

Negligence - duty of care of private building surveyor to subsequent purchaser of dwelling - apportionment of damages under s 131 Building Act 1993. Appeal - VCAT decision - alleged errors of law - duty of care - apportionment of danger.

In August 1996, the second appellant Wally Mellis (Mellis) a building surveyor employed by the first appellant, Moorabool Shire Council (Moorabool), was engaged by Stephen Watson as private building surveyor for the project. On 21 August 1996, Mellis issued a building permit number B 482/96 to Stephen Watson as "Agent Of Owner". On 28 January 1997 Mellis issued an occupancy permit.

In about July 1997, the Watsons transferred ownership of the property to Kathleen and Joseph Pozman (Pozmans). In about April 1999 the Pozmans transferred ownership of the property to the Taitapanuis.

On 27 April 2001, the Taitapanuis issued proceedings in VCAT seeking damages from Moorabool, as Mellis' employer, and from Mellis himself, for negligence in the issuing of the building permit and for the manner in which the stump hole, framework and final inspections were conducted. They also sought damages from HIA Insurances Services Pty Ltd trading as the Home Owners Warranty (the insurer) pursuant to a certificate of insurance for losses arising out of alleged defective building work by Watson Constructions. On 11 October 2002, an order was made joining Watson Constructions to the VCAT proceeding.

Notwithstanding the joinder of Watson Constructions, apparently none of the parties specifically addressed the Tribunal in relation to it. The Watsons did not appear at the hearing nor did Mellis.

In its decision handed down on 8 April 2003, VCAT found that Mellis owed a duty of care to the Taitapanuis in respect of pure economic loss. It also found that liability should be apportioned pursuant to section 131 of the Building Act 1993 ("the Act") as to 50% of the cost of rebuilding the Taitapanui's house between Moorabool and Mellis on the one hand and the builder's insurer on the other.

On 8 April 2003, VCAT ordered the appellants to pay the first respondents the sum of $96,596. The second and third respondents were ordered to pay the first respondents $99,250.[1] By order made 19 June 2003, the appellants were granted leave to appeal the order made against them.

The notice of appeal raises the following questions of law and specifies the following grounds:

"D. That the question of law upon which the appeal is brought is:

(i) Whether the Tribunal erred in finding that Wally Mellis, as a private building surveyor exercising statutory functions under the Building Act 1993, owed a duty of care to Justin and Lisa Taitapanui who were not the owners of the property at the time when the building permit was issued and the statutory inspections were performed and who only suffered economic loss as a result of damage to the building caused by his issuing of the building permit and his failure to properly carry out the statutory inspections.

(ii) In apportioning the total amount of damages between the respondents in a building action pursuant to the provisions of section 131 of the Building Act 1993 is it legally correct to limit the basis on which such an apportionment is made to an evaluation of the legal obligations undertaken by each of the respondents in relation to the building works in question; or, should at least the following further matters be taken into account:

(a) the relative causal significance or potency of the breach of such obligations to the loss and damage suffered;

(b) the relative degree of blameworthiness of or culpability associated with the breach of such obligations;

(c) the relative importance of the acts or omissions of the respondents in causing the damage; and,

(d) the relative seriousness of the breach of such obligations.

(i) Senior Member Young erred in law in finding that Mellis, a private building surveyor exercising statutory functions under the Building Act 1993, owed a duty of care to the Taitapanuis who were not the owners of the property at the time that the building permit was issued and statutory inspections were performed and who suffered pure economic loss.

(ii) Senior Member Young erred in law in determining that the apportionment of liability, pursuant to s 131 of the Building Act 1993, was limited to only an evaluation of the legal obligations undertaken by each of the respondents in relation to the building works."

Thus there are two areas of dispute - the duty of care decision and the apportionment of liability decision. I will first consider the challenge to the duty of care decision. In analysing that decision it is necessary to consider the factual basis of the Tribunal's decision and its reasoning.

Duty of care - Tribunal reasons - statutory scheme

The Tribunal attached great weight to the statutory scheme under which Mellis acted and discussed the scheme at some length.[2] It noted that the statutory control for building control, including domestic building was to be found in the Building Act 1993 (the Act) and the Building Regulations 1994, (the Regulations) together with the Domestic Buildings Contract Act 1995 which dealt with matters specific to domestic building contracts. It also noted that the Act was introduced in 1993 following a major review of the earlier legislation. Referring to the Minister's second reading speech it stated that the aims of the Act were to "free up the regulatory process and to produce legislation compatible with current and future requirements of the construction industry". It then referred to the express provisions in the Act that state that its purposes included regulating, establishing, maintaining and improving standards for the construction and maintenance of buildings.[3] The Tribunal noted that the legislation required the registration of all building practitioners, which concept included private building surveyors.[4] It referred again to the Minister's second reading speech in which he commented that the introduction of private building surveyors was expected to expedite the issuing of building permits and enable competition for business to occur with municipal building surveyors. It noted that the Minister said that he expected that the new competitive environment would result in improvements in skill in building surveyors as well as faster issuing of building permits.[5] The Tribunal also noted the Minister's observations that:

* private building surveyors would be required to work in a professional and impartial manner and would be regulated by scrutiny of the Building Control Commission and the legislation which included significant penalties;

* there would be other safe guards such as peer group scrutiny from other builders and building surveyors and the scrutiny of the insurer;

* insurers would not maintain insurance cover required under the legislation by a private building surveyor to practice[6] without a good professional record and acceptable standard of professional practice.

The Tribunal referred to the statutory definition of the functions of a private building surveyor set out in s 6 of the Act, namely:

"(a) the issuing of building permits; (b) the carrying out of inspections of buildings and building work under Part IV; (c) the issuing of occupancy permits and temporary approvals under Part V."

The Tribunal noted that the Act introduced insurance reform in the building permit industry. It observed that there was already a requirement that residential builders carry insurance but that, again referring to the second reading speech, the introduction of compulsory insurance for all building practitioners would put them all on the same footing and provide building owners with more certainty. The Tribunal then stated the following:

"3.15 I consider this demonstrates that the legislature was setting out to provide a comprehensive scheme of overall building regulation with the registration of building practitioners and the need for professional indemnity insurance for practitioners such as building surveyors."

The Tribunal then referred to s 131 of the Act which it stated was intended to complement the insurance scheme and ensure that contribution to damages awards was equitable and did not involve an uncertain risk for the insurers. Section 131 of the Act provides:

"(1) After determining an award of damages in the building action, the Court must give judgment against each defendant to that action who is found to be jointly or severally liable for damages for such a proportion of the total amount of damages as the Court considers to be just and equitable having regard to the extent of that defendant's responsibility for the loss or damage. (2) Despite any Act or Rule of Law to the contrary, the liability for damages of a person found to be jointly or severally liable for damages in a building action is limited to the amount for which judgment is given against that person by the Court. (3) In this section - `Court' includes the Victorian Civil and Administrative Tribunal."

The Tribunal commented that the effect of this section was to limit the liability of persons jointly or severally liable in building actions to their apportioned share of the liability. The Tribunal also noted that s 134 introduced a limitation period of 10 years after the date of issue of an occupancy permit in respect of the building work or, where an occupancy permit is not issued, the date of issue of certificate of final inspection.

The Tribunal also referred to another aspect of the legislative scheme which was a statement of professional standards in Regulation 15.2 of the Regulations. So far as is relevant to these proceedings, it provides:

"A registered building practitioner must - (a) perform his or her work as a building practitioner in a competent manner and to a professional standard; . . ."

The Tribunal also noted that the Act set out the specific functions of a private building surveyor when considering the issuing of a building permit. In particular s 19 of the Act which identified three options; issuing the permit, issuing the permit with conditions or refusing the permit. It referred also to section 24 of the Act which, so far as relevant, provides that:

"(1) Subject to Division 4, the relevant building surveyor must not issue a building permit unless he or she is satisfied that - (a) the building work and the building permit will comply with this Act and the Building Regulations; and"[7]

The Tribunal also referred to s 34 of the Act which requires the private building surveyor to carry out inspections at mandatory notification stages. The latter are defined, as the Tribunal noted in Regulation 7.1 "Inspection of Building Works". In particular it provides:

"(1) For the purposes of Part 4 of the Act the mandatory notification stages are - (a) prior to placing a footing; and (b) completion of frame work; and (c) prior to pouring an in situ reinforced concrete member nominated by the relevant building surveyor; and (d) final, upon completion of all building work."

Duty of care - factual basis of the Tribunal decision and its findings

On 20 August 1996, Mellis notified the Surf Coast Shire by notice under the letterhead of the Moorabool Shire Council, that he had been appointed as the private building surveyor to carry out the functions of municipal building surveyor pursuant to s 76 of the Act for the erection of a dwelling at Lot 9 The Mews, Torquay. Mellis was paid a fee by Mr Watson. There was in evidence a receipt from Mellis for his fee. The "payee" (sic) was marked as Stephen Watson. The Tribunal noted that there was "no evidence whether Watson paid in his own personal capacity or on behalf of Watson Constructions".[8] It did not, however, make a finding as to the person with whom Mellis contracted. The Tribunal took the view that that question did not affect its decision.[9] The Tribunal subsequently analysed the questions raised on the assumption that the private building surveyor did not have a contract with the original building owners.[10]

Mellis received the building permit application. The application form also bore the Shire of Moorabool letterhead. It stated that the building in question was a two storey building. There was no indication in the application form of the nature of the building work. The areas for the building practitioner's name, category and registration number were struck through and no information provided.[11] The section directed to "owner/builder" was not completed.

On the same day, 21 August 1996, Mellis issued a building permit, number B482/96. It noted the inspection requirements as follows -

"the mandatory notification stages are stump hole - foundation - frame and final".

It was issued to Mr Watson as owner and Mr Watson was nominated as builder but no registration number was recorded. The building classification was "1(A)" and was described as a two storey dwelling. The permit left blank the identification of the materials for roofing, the frame and external walls. The Tribunal presumed, however, that at the time of the issuing of the building permit, Mellis approved four plans marked "design and construct: Watson Constructions Pty Ltd" which it described as "rough and undetailed". The Tribunal also found that in relation to inspection, the records showed that Mellis approved the stump holes on 23 August 1996, the frame construction on 18 December 1996 and made his final inspection on 22 January 1997. He issued an occupancy permit under Regulation 9.5 on 28 January 1997.

The Tribunal recorded the fact that the Shire of Moorabool acknowledged that, if Mellis was found liable, it was vicariously liable.

An application for builder's insurance dated 18 August 1996 was produced. It had a signature on the builder's declaration but no signature on the client declaration. It stated that Watson Constructions was the builder. A Certificate of Insurance was issued on 13 July 1998. The certificate nominated Watson Constructions as the builder and the Pozmans as the owners under a fixed price contract dated 10 July 1998. No such contract was produced. The Tribunal commented that the precise identity of the builder was not clear, but the registered domestic building practitioner was Mr Watson who controlled Watson Constructions. The Tribunal, in the end, concluded on the basis of the plans, the insurance application and the Certificate of Insurance, that the most likely identify of the builder was Watson Constructions.

The Tribunal also noted that the insurer accepted liability in respect of the owner's claim and did so by a letter of 21 December 2001 in which it made an open offer of $56,100. I note that the insurer took issue with liability for garage works, it not being referred to in the building permit on the endorsed plans. The Tribunal ultimately held that the private building surveyor had no liability for that work but that the Certificate of Insurance covered the garage.[12]

In its findings, the Tribunal noted that the house was built on land with a slope of approximately 1 in 20 and with a substantial uphill catchment resulting in substantial overland flow on to the subject property and through the house site.[13] The soil was classified as Class H for the purpose of the relevant Australian Standard with respect to likely surface movement due to soil moisture changes. Class H soil is soil that is highly susceptible to changes in volume thereby generating relatively large surface movements with changes in soil moisture regime.

The Tribunal noted that the house constructed was a two-storey house. The footings were a stump and pad footing system.[14] The external walls were clad with the CSR "Powerpanel". This was a 75 mm thick reinforced panel made from CSR "Hebel" autoclaved aerated concrete . The Powerpanels were a veneer over a wooden frame. The internal lining was plaster board. Timber and blue board was used on most of the external walls of the first floor.

On 23 June 1997, Mr and Ms Pozman entered a contract to purchase the dwelling, by then constructed, from the Watsons. A special condition provided for the completion of work for the garage then under construction.

On 7 January 1999, the Pozmans sold the property to the Taitapanuis. The Tribunal noted that after they took possession, they became aware of defects in the building. Mrs Taitapanui initially noticed water leaking from the extremities of the en-suite shower recess, with the tiles lifting. She also became aware that the dishwasher leaked. The Tribunal also noted that tradesmen who came to rectify those problems observed substantial non-conforming plumbing work. In September 1999, there was major water entry above the French doors in the main bedroom, water was pooling on the balcony and the kitchen tiles were lifting. Towards the end of 1999, significant quantities of water entered the downstairs meal, living and kitchen areas from the balcony and upstairs areas. This resulted in the Taitapanuis seeking expert help. They contacted a Mr Hamill, a former municipal building surveyor for the Surf Coast Shire. He reported a number of serious construction defects and arranged for an inspection by a CSR representative, Mr Nunn. He found the exterior Powerpanel work to be unsatisfactory and advised the owners to obtain the advice of a structural engineer, Mr Evans. He identified very serious structural inadequacies starting with the incorrect footings systems - the use of stumps which were too flexible and too susceptible to settlement in a Class H soil to support satisfactorily the Powerpanel external walls. He reported that the "CSR Powerpanel" users guide required, as a minimum requirement, footings which complied with conventional masonry veneer construction as specified in Australian standard: AS 2870.1 - 1998 "Residential Slabs and Footings". This standard required a reinforced concrete strip footing. The same requirement was in force in 1996. The Tribunal noted that a stump footing system was entirely inappropriate to support the Power panel walls. Mr Evans also identified a stump in the meals area which had settled excessively. It had surface soil and loose material beneath the sole plate, a serious defect. The Tribunal also noted that the structural support for the garage was completely inadequate. An attempt had been made to support the north side of its roof by brackets attached to the Powerpanel which was not designed to be a load bearing element.

The Taitapanuis sought the advice of a building consultant, Mr Setford. The Tribunal noted that his advice was that the building structure was so compromised by the wrong type of footing system that it was cheaper to demolish and rebuild rather than try to rectify the inadequacies in defects. It also noted that the insurer's expert, Mr Browning, agreed with Mr Setford about the identity and extent of the items of defective works and that it would be very costly to rectify them but considered demolition and rebuilding unnecessary as the cladding could be replaced with Hardieplank, although he acknowledged that this would breach the restrictive covenant applying to the property which required 75 percent masonry.

The Tribunal noted that all parties accepted that there were very serious deficiencies in the construction of the house, the most significant being the inadequate footings. It also noted that all experts agreed that the use of stumps would result in an unacceptable deformation to the Powerpanel resulting in cracking of joints and unacceptable deterioration of the panels to the point that they would permit water penetration and render the house uninhabitable. The Tribunal noted that there was already significant cracking at the joints of the Powerpanels and differential displacement and deterioration and that this was becoming gradually worse with time. The Tribunal found that there had also been a large amount of water penetration to the house through other defective work, such as defective tanking, and the house was suffering continuing deterioration from water penetration. The Tribunal found that water penetration of the external walls due to cracking and deterioration contravened the Building Code of Australia which was incorporated into the Regulations. The Tribunal then turned to the evidence about the performance of Mr Mellis.

The Tribunal noted that Messers Hamill , Evans and Browning agreed that there were substantial deficiencies in the issuing of the permit. The deficiencies listed by the Tribunal were:

* no specification had been provided describing materials and methods to be used in construction as required by Regulation 2.1.

* the plans did not identify the external wall material, but did show a wall thickness of 250 mm which should have alerted Mellis to the fact that a masonry product was likely to be used. The Tribunal also accepted that Mellis was Mr Watson' s building surveyor of choice and that Mr Watson was well-known in the area for using "Powerpanel".

The Tribunal also held that Mellis had failed his basic functions as set out in Regulation 2.1(1)(b) of ensuring that the application contained sufficient information to ensure that the building work would comply with the Regulations. The Tribunal described his conduct as "gross carelessness and incompetence".[15 ] The Tribunal was highly critical of the documentation produced, for the purposes of compliance with the relevant legislation and regulations. Inter alia, the plans were described as "completely inadequate and appear in effect to have been done by a thumb nail tipped in tar."[16]These conclusions were plainly justified.

The Tribunal also noted that Mr Browning in his report identified 20 construction defects that he considered Mr Mellis should have picked up in his inspections. The Tribunal mentioned in particular:

* subfloor defects in the bearers and joists together with subfloor ventilation;

* the failure to provide the correct safety glass in the lower panels to windows and doors.

The Tribunal rejected Mellis' argument that the issue was whether the private building surveyor owed a duty of care to prospective purchasers. It defined the issue as being whether a private building surveyor owed a duty of care to subsequent owners, who were in possession when substantial defects allegedly due to the building surveyor's default became apparent.[17] It approached that question on the basis that it must first be established whether a duty of care was owed by the building surveyor to the building owner at the time of erection of the building.[18]

The Tribunal referred to the leading authorities. It expressly adopted the incremental approach of reasoning "by analogy with established categories" stated by Brennan J in Shire of Sutherland v Heyman[19] and expressed the view that the correct approach was to look at the "salient features" of the relationship between the relevant parties. Referring to Callinan J in Graham Barclay Oysters Pty Ltd v Ryan[20] and Gillard J in Johnson Tiles Pty Ltd & Anor v Esso Australia Pty Ltd[21] it identified as possible salient features the following:

"reliance, undertaking of responsibility, a chain of contracts between the parties, a statutory regime regulating the supply of a service, whether imposing a duty would result in indeterminate liability or be inconsistent with normal business standards, the knowledge of the tortfeasor and vulnerability."[22]

The Tribunal also noted that it was obvious that not all of the above salient features would be "of equal significance in each case"[23] and that it was not necessary that each be present in some degree to establish a duty.[24] The Tribunal indicated it would proceed on the basis of the need to carefully analyse and assess each relevant feature and to assess its significance and weight in the process of assessment.[25] The Tribunal stated that it should stand back and look at the reasons why the courts take care in this area of economic loss - namely concerns about the possibility of "liability for an indeterminate amount for an indeterminate time to an indeterminate class" and a concern not to establish a rule that would "render `ordinary' business conduct tortious.[26] The Tribunal also noted Brennan J's observation in Heyman[27] that:

"A private purchaser in the market place cannot look to public funds to underwrite the information on which he makes his purchase, except in circumstances which may attract the operation of the principle in Shaddock & Associates Pty Ltd v Paramatta City Council [1981] HCA 59; (1981) 150 CLR 225."

The Tribunal stated its intention to keep the observations referred to above "as touch-stones in assessing the significance and weight of a salient feature".

Before turning to what it saw as the salient features in this case, the Tribunal referred to Heyman's case and distinguished it on the basis that the private building surveyor in the circumstances of the present case had a mandatory obligation to inspect the foundations prior to any footings being constructed unlike the municipal officers in Heyman who did not have a statutory obligation to carry out an inspection of the foundations prior to footing construction.

The Tribunal first considered whether the statutory functions of the private building surveyor indicated that a common law duty was owed to the building owner at the time the dwelling was constructed.[28]

The Tribunal referred to the statement in Caledonian Collieries Ltd v Speirs[29] that:

"On the assumption stated the well settled principle applies that when statutory powers are conferred they must be exercised with reasonable care, so that if those who exercise them could by reasonable precaution have prevented an injury which has been occasioned and was likely to be occasioned, by their exercise, damages for negligence may be recovered."

The Tribunal stated that it considered that as a statement of principle this would apply both to a private and municipal building surveyor. It then noted that all building practitioners including private building surveyors were required under the legislation to be registered and to have professional insurance. Further, Regulation 15.2 of the Building Regulations 1994 required all building practitioners to carry out their duties competently and to a professional standard. It concluded that private building surveyors needed insurance to indemnify the quality of their work presumably to the standard required in Regulation 15.2 and to ensure the building owners received an acceptable product.[30] The Tribunal then noted that the building owner who engaged the private building surveyor would have a cause of action in contract for the negligent performance of surveyor's duties. Otherwise,[31] the Tribunal reasoned, it would be without remedy unless there was a remedy in tort. The Tribunal considered it,

"Therefore ... a significant feature that if it was held no duty existed, a building owner would have no redress against a private building surveyor in circumstances where the statutory structure required that building surveyor to have professional insurance to cover the eventuality of the private building surveyor failing to perform its functions satisfactorily competently."

Reference was then made to s 131 of the Act which requires a respondent to pay only its apportioned liability. The Tribunal reasoned that the result was that a building owner could not recover for the private building surveyor's degree of liability unless a duty was established. The Tribunal concluded that:

"To ensure that the 1993 statutory structure for building control operates satisfactorily for all owners, including those whose claims were in negligence, it is necessary that private building surveyors be under a duty to building owners."[32]

The Tribunal then asked whether there were any indications that a duty of care should not be found.[33] It referred first to the issues of indeterminacy. It stated that liability could not be in an indeterminate amount because s 131 only required payment of the apportioned amount of liability.[34] Further, it could not be for an indeterminate time because s 134 of the Building Act required the action to be brought within 10 years of the date of issue of the occupancy permit. It also stated that the class was not indeterminate because it could only be a class of persons noted on the Register as owners of the property. The Tribunal stated, assuming that normal community behaviour was that there was not a high turn-over of private dwellings, the class could not be regarded as large or indeterminate over a 10 year period.

On the issue of avoiding impediments to ordinary business conduct, the Tribunal stated that the statutory structure was designed to protect home builders and to ensure they could achieve a satisfactory standard of house construction. The Tribunal held that to find a duty of care would enhance ordinary building conduct. In particular, incompetent private building surveyors would not escape the liability of their incompetence. If no duty of care existed, the Tribunal argued that either the home owner would be unable to recover the defaulting private building surveyor's proportion or such proportion would have to be carried by any other building practitioner who had some liability.[35]

The Tribunal then turned to the observation of Brennan J quoted above about private purchasers not being permitted to look to public funds to underwrite the consequences of incorrect or faulty information on which a purchase was based. The Tribunal, again referring to the statutory scheme, noted that under the scheme no public funds would be called upon in claims against them.

Finally, the Tribunal noted, but in the end rejected, any concern about a possible different liability between a private building surveyor and a municipal building surveyor in light of authorities such as Heyman and Barclay Oysters. The Tribunal did not consider that this would act as a bar to finding a duty to exist on the part of a private building surveyor although it might be inconvenient and appear inconsistent. It went on to suggest that it may be that in light of the particular statutory structure, however, a municipal building surveyor carrying out similar functions to that of a private building surveyor would be held to owe a duty of care but that there may be a distinction to be drawn where an exclusive discretionary judgment was to be exercised by a municipal building surveyor - for example, in issuing emergency orders.[36]

It concluded this part of its analysis by pointing out that the issue of the allocation of municipal resources had no bearing on the question of whether a private building surveyor owed a duty of care to a dwelling owner.

The Tribunal then turned to consider the issues of vulnerability, control and professional competence as matters relevant to a decision whether a duty of care arose they, as the Tribunal put it, providing the elements additional to foreseeability "to establish a duty of care that is now required in the case of claims for economic loss".[37]

The Tribunal again referred to the statutory scheme. It had earlier stated that the purpose of the scheme was "one of the most important salient features".[38] It referred to the creation of private building surveyors, and the provisions, to argue that the building surveyor is required to exercise specific professional skills in examining plans and specifications and carrying out inspections to ensure that the building work, for which he has been appointed the building surveyor, conforms with the Act and Regulations. The Tribunal stated "this is his sole function". The Tribunal commented that this required a certain amount of skill and knowledge and was done for a commercial fee.[39] The Tribunal commented that home owners have no knowledge as to whether building work complies with the Act and Regulations and are required to hire a professional private building surveyor for which they pay the appropriate fee. The Tribunal then commented:

"Where the private building surveyor has the professional knowledge and understands his function, he is the only party that can ensure that the builder carries out his obligations in accordance with the Act and Regulation. I consider these circumstances to be a strong indicator that a duty should exist."

As I read the Tribunal's reasons, the Tribunal is here referring to the question of a duty of care owed to the owner of the premises at the time the building is being constructed. The Tribunal then went on to endorse the comments of Gummow J in Perre v Apand[40]:

"But where the defendant has actual knowledge of the risk and its consequences for an ascertainable class and it is not legitimately pursuing or protecting its interests, I see no reason why that actual knowledge should not be an important factor in deciding the duty issue. Furthermore, because fault remains the basis of negligence liability, I see no reason why recklessness or gross carelessness should not be a relevant factor in determining whether a duty of care was owed."

The Tribunal noted that no party disagreed that in this case there was a gross falling short of the professional competence required but then stated that it did not consider that the degree of fault could be any more than a gloss in the assessment and could not be decisive. The Tribunal concluded that, notwithstanding the private building surveyor exercised the statutory function to ensure that the Act and Regulations and their objects and purposes were achieved, it could see no reason why he and Moorabool should be treated any differently from other professionals and should not be liable for professional negligence to third parties like other professionals such as lawyers in Hill v Van Erp[41] and Hawkins v Clayton.[42] The Tribunal also stated that if there was to be no duty owed by the private building surveyor to the original building owner, the position should be abolished.

The Tribunal then turned to the position of the subsequent owners. It asked if there were any differences or alterations in the relationship between any subsequent owner and the building surveyor that would indicate that if a duty existed to the building home owner it should not to a subsequent owner.

The Tribunal accepted, as a prima facie conclusion, the proposition that any duty should not extend beyond what were the terms of the contract between the building surveyor and the building home owner. It noted the criticism of the majority decision in Brian v Maloney in this area. The Tribunal noted, however, that that issue did not arise here because any contractual relationship with the building owner would have to impose the same duties and obligations as the Act and Regulations imposed because the scope for the contract was the same. The Tribunal concluded there could not be any substantial differences between the scope of the terms of the contract with the building owner and the width of the duty owed to any subsequent purchaser.

The Tribunal then noted that it did not see anything that changed "the extent of the duty" when considering subsequent purchasers except that the question of vulnerability may change.[43] The Tribunal referred to submissions made for the building surveyor that subsequent purchasers could obtain a pre-purchase inspection and report and that in doing so had some control over the quality of the item they were purchasing and were therefore not vulnerable, as discussed in Perre v Apand, or lacking control, as discussed in Hill v Van Erp. The Tribunal concluded, however, that the ability to obtain a pre-purchase report did not weaken the need for finding a duty existed. The Tribunal accepted that that opportunity made a subsequent purchaser less vulnerable than the original building owner and gave the subsequent owner more control. Against that, however, the Tribunal noted the availability of pre-purchase inspectors and that the number of inspections carried out suggest that there remains a concern that domestic dwellings do not meet regulations and that:

"A cause of this, must in part, be a failure of private building surveyors to competently carry out their functions."[44]

The Tribunal expressed the view that these matters indicated that as a matter of policy a duty should be found to exist.

In the end, however, the Tribunal took the view that subsequent owners were in fact more vulnerable. It commented that it was the structural elements of building work that could cause the most substantial and lasting damage and once they are covered they are not available for inspection without intrusive and expensive investigation. The Tribunal stated that this was the reason for mandatory statutory inspections except for the final inspection. In relation to structural defects, therefore, the Tribunal considered a subsequent purchaser was in a more vulnerable position than the building owner.

The Tribunal then turned to submissions advanced for the building surveyor that the Taitapanuis had not given any evidence of reliance upon the Council or the private building surveyor. The Tribunal saw the position of the private building surveyor as being different in that, if a municipal building surveyor issued the building permit, then the assessment would be on the Council's building file. With a private building surveyor, however, any prospective purchaser has no right to obtain access to that person's assessments. The Tribunal also commented that the subsequent owner could not obtain the name of the private building surveyor without obtaining the vendor's permission to access the municipality's building file. The Tribunal expressed the opinion that the impracticality of obtaining information had lead to a substantial increase in the demand for pre-purchase inspections.[45]

The Tribunal also rejected an argument that actual reliance was essential and that this required direct contact between the parties. It noted that in Hill v Van Erp there was none - nor in Pyrenees, as noted by Gummow J.[46]

The Tribunal then concluded by directing its attention to the categories of cases in which a duty has been held to exist and not to exist. It suggested that the most applicable category was the field of professional negligence. The Tribunal could see no reason why the tort of professional negligence should not include the performance of a private building surveyor in carrying out his statutory functions. It then suggested that the nearest and most appropriate category of case where no duty had been held to exist was that of a municipal building surveyor to a subsequent owner, referring to Heyman's case. It asked the question whether the boundary should be moved to include that of the private building surveyor to a subsequent owner. The Tribunal stated that it considered that a duty of care should be borne by private building surveyors. It referred in particular to them having a duty of care where personal injury is involved.[47] It identified as the main salient feature the comprehensiveness of the statutory scheme, one designed to protect domestic building owners, and one that created a new profession of private building surveyor as part of that comprehensive scheme. The Tribunal did not consider that just because the private building surveyor was carrying out statutory functions there could be no duty and referred to its earlier reasons for distinguishing Heyman.

I have set out the reasons of the Tribunal in some detail. I have done so not merely because the parties' submissions will require reference to them but because they provide a thorough analysis of the issues. As will be seen, I agree with most but not all aspects of that analysis. I note, in particular, the Tribunal's approach of determining first whether a duty of care was owed to the original building owners and then considering whether to extend the duty so found to subsequent purchasers. This approach accords with the majority analysis in Bryan v Maloney and in Woolcock St Investments Pty Ltd v CDG Pty Ltd & Anor (Woolcock)[48]. In considering the question of law raised about whether a duty of care arose, as I am obliged to do, I have taken an approach[49] that, while incremental, is arguably less so than the approach of the Tribunal. Its approach may prove to be the approach that receives the ultimate approval in cases of this kind. Both approaches, however, lead to the same conclusion.

Duty of care - submissions as to the approach to be taken

The major question in this appeal is whether, in the circumstances of the case the alleged duty of care arose. If it did arise, there is no dispute between the parties that Mellis had been negligent, particularly in relation to the footings that he approved and that the necessary causal link existed between the negligent conduct and the loss or damage. There is also no dispute that to rectify that problem it is necessary to demolish the house.

In considering the parties' submissions on the appeal, it is appropriate and convenient to commence with the submissions made by the Taitapanuis in support of a conclusion that such a duty of care existed. I will consider first the submissions directed to the approach to be taken in determining that question.

Counsel commenced by emphasising that the question of the existence of a duty of care arose in a situation where the alleged negligence consisted of positive acts - the issue of building permit and the negligent conduct of inspections. Counsel also emphasised, that Mellis had voluntarily entered into his engagement as private building surveyor and done so for profit. Counsel argued that this case was, therefore different from the two leading High Court cases relied upon by the Council and Mellis as the authorities most in point - Sutherland Shire Council v Heyman and Another[50] and Pyrenees Shire Council v Day[51]. Counsel submitted that those authorities raised the issue of the duty of care of a municipal authority in circumstances where it had not taken discretionary steps which it was empowered to take. Counsel argued that this was a critical point of distinction.[52] I accept that submission.

Counsel also submitted that it was clear from the Tribunal's findings that the critical problem was the deficient footings and that even if the house had been constructed in accordance with the approved plans, the footings would be inadequate and damage was not just foreseeable, it was inevitable. Counsel relied on their obvious criticality but also on a comparison with rectification costs of the other defects. This analysis should also be accepted.

There being no authority precisely in point, counsel submitted that the answer was to be found by considering analogous situations where the Courts have accepted that a duty of care has arisen and argued that to find a duty of care in the present situation was to do no more than develop the law by permissible increments. Counsel referred to a passage in a judgment of McHugh J[53] where His Honour posed the question of how to approach the issue of duty of care when the case falls outside an established category. His Honour commented that where the defendant should reasonably have foreseen that its conduct would cause harm to the plaintiff

"we have only to ask whether the reasons that called for or denied a duty in other (usually similar) cases require the imposition of a duty in the instant case. No doubt that may sometimes mean that, whether or not a duty is imposed at a particular time, will depend on the extent to which the case law has progressed to that time. But that is the way of the common law, the judges preferring to go 'from case to case like the ancient Mediterranean mariners, hugging the coast from point to point, and avoiding the dangers of the open sea of system or science'. [54] It is not an approach that appeals to grand theorists who prefer to decide cases by general principles applicable to all cases. But in an area of law such as awarding damages for negligently inflicted economic loss, which is still developing and which has recently been cast adrift from any unified principle, there is no alternative to a cautious development of the law on a case by case basis.[55]...Until a unifying principle again emerges, however, the best solution is to proceed incrementally from the established cases and principles."

Counsel submitted that the alternative approach was to adopt the analysis of Gillard J, in Johnson Tiles Pty Ltd and Another v Esso Australia Pty Ltd[56] - a three step approach in which what became critical was the identification and weighing up of the "salient features" in the relationship. The three tiered test identified involved the issues of reasonable foresight of risk of harm, "proximity" and "salient features".[57] In referring to "proximity", his Honour was referring to Lord Atkin's definition of the neighbour:

"Persons who are so closely and directly affected by my act I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question."[58]

Counsel for the appellants, however, argued that to find a duty of care in the present case would be inconsistent with the common-law incremental approach. They argued that the question was to be resolved by applying the three tiered test of Gillard J in Johnson Tiles and that the circumstances of the present case did not satisfy that test.

Generally, the recent High Court decisions have not put forward any tiered approach of general application. Rather they have required an incremental approach drawing upon analogous situations. That, however, does not mean that a structured approach cannot be taken in the circumstances of a particular case - as was done by Gillard J.

The recent decisions refer to the issues listed by the Tribunal and consideration of the features of the alleged relationship forms part of the consideration of "salient features".[59] Further, they make clear, if it was not already, that the reluctance to impose a duty of care to avoid economic loss derives from concerns about indeterminate liability, the inappropriate interference in acceptable commercial activities and possible inconsistency with or intrusion into other areas of the law. If a case raises any of those concerns, it will be difficult, if not impossible for a plaintiff to establish a duty of care to avoid economic loss even though reasonable foreseeability of such harm can be established. If none arise and reasonable foreseeability of harm can be established, the major hurdles facing a plaintiff claiming damages for economic loss will usually be removed. But more is still required in applying an incremental approach. A particular additional feature[60] that has been identified is "vulnerability". In the present case that and other issues need to be considered - notably the statutory scheme.

The parties developed more detailed arguments in support of their positions on the duty of care issue. Before turning to them, I note that counsel for the insurer, the second respondent, adopted and relied upon the arguments advanced by counsel for the Taitapanuis.

Duty of care - the argument of the Taitapanuis -Bryan v Maloney

Counsel for the Taitapanuis submitted that the present case was analogous to those cases where the defendant accepted a retainer to provide services or performed a statutory function.[61] Each case involved economic loss. In each case the defendant had done work for a person pursuant to a contract. Each concerned the question whether a duty of care was owed to a third party. In two cases, the defendant was a solicitor and it was held that the solicitor owed a duty of care to persons other than the client[62]. In one case, the defendant was a builder who was held to owe a duty of care to a subsequent purchaser of the property in question.[63] The fourth case concerned the granting of a development application by a municipal Council in which it was held that a duty of care was owed by the Council to a subsequent purchaser of part of the property in question.[64]

Counsel submitted that, in the present case, Mellis was engaged by the original owners of the property for a fee to carry out various statutory obligations.[65] Counsel submitted that in accordance with the above authorities and general principle, Mellis owed a duty of care to the original owners[66] and to a subsequent purchaser of the property.

Counsel for the Taitapanuis placed particular emphasis on Brian v Maloney, as the most analogous case. It will be recalled that in that case the High Court held that a builder, Bryan, who negligently constructed the foundations of a home, owed a duty of care to a subsequent purchaser of that home, Mrs Maloney. Counsel referred to a number of passages which it was said were significant in identifying the circumstances giving rise to a duty of care.

Counsel referred to the majority's[67] statement about an established relationship of proximity between the builder and the first owner. Counsel commented that it was in the context of that relationship that one must determine whether the necessary relationship existed between a builder such as Mr Bryan and a subsequent owner such as Mrs Maloney.

At that time, of course, discussion centred on the issue of "proximity". In considering whether there was the requisite degree of proximity the majority commented:

"It is likely that the only connection between such a builder and such a subsequent owner will be the house itself. Nonetheless, the relationship between them is marked by proximity in a number of important respects. The connecting link of the house is itself a substantial one. It is a permanent structure to be used indefinitely and, in this country, is likely to represent one of the most significant, and possibly the most significant, investment which the subsequent owner will make during his or her lifetime. It is obviously foreseeable by such a builder that the negligent construction of the house with inadequate footings is likely to cause economic loss, of the kind sustained by Mrs Maloney, for the owner of the house at the time when the inadequacy of the footings first becomes manifest. When such economic loss is eventually sustained and there is no intervening negligence or other causative event, the causal proximity between the loss and the builder's lack of reasonable care is unextinguished by the lapse of time or change of ownership."[68]

Their Honours then raised the question of whether mere economic loss might preclude recognition of the requisite relationship. After referring to the fact that the relevant relationship would have existed between the builder and Mrs Maloney with respect to ordinary physical injury to her or other property caused by a partial collapse of the house, their Honours commented that it was important to bear in mind the particular kind of economic loss involved.

"As has been said, the distinction between that kind of economic loss and ordinary physical damage to property is an essentially technical one. Indeed, the economic loss sustained by the owner of a house by reason of diminution in value when the inadequacy of the footings first become manifest by consequent damage to the fabric of the house is, at least arguably, less remote and more readily foreseeable than ordinary physical damage to other property of the owner which might be caused by an actual collapse of part of the house as a result of the inadequacy of those footings. Again, the policy considerations underlying the reluctance of the courts to recognise a relationship of proximity and a consequential duty of care in cases of mere economic loss are largely inapplicable to the relationship between builder and subsequent owner as regards that particular kind of economic loss."[69]

The majority went on to point out that there was no inconsistency between the builder's legitimate pursuit of his or her own financial interest because the builder owed a duty of care to the first owner. They also commented that where economic loss is sustained by an owner when the inadequacy of footings first becomes manifest, there is no basis for concluding that finding a duty of care would give rise to liability in an indeterminate amount to an indeterminate class more so than would occur by recognition of a duty of care as between the builder and the first owner. After considering the issue of indeterminacy of time, the majority then went on to consider the issues of assumption of responsibility and reliance. They commented:

"Upon analysis, the relationship between builder and subsequent owner with respect to the particular kind of economic loss is, like that between the builder and first owner, marked by the kind of assumption of responsibility and known reliance which is commonly present in the categories of case in which a relationship of proximity exists with respect to pure economic loss. In ordinary circumstances, the builder of a house undertakes the responsibility of erecting a structure on the basis that its footings are adequate to support it for a period during which it is likely that there will be one or more subsequent owners. Such a subsequent owner will ordinarily have no greater, and will often have less, opportunity to inspect and test the footings of the house than the first owner. Such a subsequent owner is likely to be unskilled in building matters and inexperienced in the niceties of real property investment. Any builder should be aware that such a subsequent owner will be likely, if inadequacy of the footings has not become manifest, to assume that the house has been competently built and the footings are in fact adequate."[70]

Their Honours went on to say that they could see no difference of significance between the relationship between the builder and first owner and builder and subsequent owner in relation to the particular kind of economic loss in question. They commented that:

"Both relationships are characterised, to a comparable extent, by assumption of responsibility on the part of the builder and likely reliance on the part of the owner. No distinction can be drawn between the two relationships insofar as the forseeability of the particular kind of economic loss is concerned: it is obviously forseeable that the loss will be sustained by whichever of the first or subsequent owners happens to be the owner at the time when the inadequacy of the footings becomes manifest. In the absence of competing or intervening negligence or other causative event, the causal proximity between negligence on the part of the builder in constructing the footings and consequent economic loss on the part of the owner when the inadequacy of the footings become manifest is the same regardless of whether the owner in question is the first owner or a subsequent owner."[71]

Their Honours commented that the policy considerations militating against recognition of a relationship of proximity and a consequent duty of care with respect to pure economic loss were insignificant and that there were persuasive policy reasons to recognise such a relationship and duty. They drew attention in particular to the superior knowledge skill and experience in the construction of homes of the builder who would be "better qualified and positioned to avoid, evaluate and guard against financial risks posed by latent defects".[72]

It should be noted that the majority had stated the question before it in the following terms:

" ... whether under the law of negligence, a professional builder who constructs a house for the then owner of the land owes a prima facie duty to a subsequent owner of the house to exercise reasonable care to avoid the kind of forseeable damage which Mrs Maloney sustained in the present case, that is to say, the diminution in value of the house when a latent and previously unknown defect in its footings was structure first became manifest."[73]

In concluding their reasons the majority cautioned that the decision turned:

" ... to no small extent on the particular kind of economic loss involved, namely the diminution in value of a house when the inadequacy of its footings first became manifest by reason of consequent damage to the fabric of the house. In particular, the nature of the property involved, namely a building which was erected to be used as a permanent dwelling house, constitutes an important consideration supporting the conclusion that a relevant relationship of proximity existed between Mr Bryan, as the builder, and Mrs Maloney, as a subsequent owner."[74]

Their Honours then went on to caution that the decision was not directly decisive of other questions concerning other relationships and referred in particular to the question of the relationship between manufacturer and purchaser of chattels which contain a latent defect.

Counsel for the Taitapanuis, referring to the liability of the builder in the present case, submitted that there existed a contract between the original owners and the builder imposing duties, the damage was of a kind similar to that in Bryan v Maloney, and the purchasers had similarly looked at the premises but made no express inquiries about the premises and had assumed a satisfactory condition. Counsel also submitted that the relationships between the original owner and the builder were similar - the builder in Bryan was a brother-in-law of the owner and in the present case a related company. Also, the foundations were unsuitable and one needed plans, expertise and technical knowledge of the relevant Australian Standard or the manufacturer's specification, or both, before the problem would be seen. Counsel also submitted that the negligence of Mellis did not constitute intervening negligence which might result in the negation of a duty of care of the builder or a break in the chain of causation; Mellis was in control but his negligence permitted the builder to go ahead in accordance with the negligent design and plans.

Turning to the position of the private building surveyor, Mellis, counsel submitted that he was also intimately connected with the construction of the home - in particular, the construction of the foundations. He had undertaken to determine whether a building permit should be issued and to inspect the premises at various critical stages of construction. He had undertaken the responsibility of ensuring compliance with the Building Regulations and the standards they require. He had the power and responsibility to require further information and plans, to refuse to grant the permit and to halt construction if the construction works did not comply with the permit or the building regulations. Counsel submitted that not only was he closely involved in the construction of the building, he had ultimate control of its construction. I note that counsel for the appellants emphasised that Mellis was not required to supervise the construction. This is true, but it must be accepted that Mellis was a key figure involved in the construction of the building and did exercise ultimate control, particularly in the area that ultimately mattered the most - the foundations of the property.[75]

Council for the Taitapanuis submitted that the decision in Brian v Maloney had been cited with approval in Hill v Van Erp[76] and in Proprietor's Units Plan Number 95/98v Jiniess Pty Ltd.[77]

Counsel for the appellants examined the evidence and reasons of the Tribunal at some length. They submitted that to find a duty of care in the present case involved an extension of law which was more than incremental and one which, in light of the authorities since Bryan v Maloney, cannot properly be made.

Counsel referred to and relied on the criticisms of Brooking JA in Zumpano and Another v Montagnese.[78] His Honour raised some twelve substantial questions,[79] and a number of subsidiary questions, as to the scope of the decision of Bryan v Maloney. Most do not arise in this case. The following warrant mention.

* The second question raised by his Honour concerned whether Bryan v Maloney is confined to the situation where there is a contract between the building owner on the one hand and the builder on the other. It does arise in this case.

The Tribunal did not reach a conclusion on the question whether there was an initial relationship between the private building surveyor and the owners. But under the Building Act[80] only the owner can appoint a private building surveyor and the limited evidence adduced was consistent with such a relationship. Further, the appellants led no evidence before the Tribunal to contradict that conclusion. Any legal analysis in this case, therefore, should proceed on the basis that there was a contract between the owners and Mellis under which he had contractual and common law duties which were owed to both owners. The question of contributory negligence on the part of Mr Watson and whether Mrs Watson would have been affected as principal are other matters.[81]

* The twelfth question raised by Brooking JA related to whether the statutory scheme then in existence bore on the question whether a duty of care should be imposed. The legislative scheme now in place is different.[82] I refer to and repeat the Tribunal's analysis summarised above and my comments. To them I add the following points.

Under the present statutory scheme, potentially any professional involved in the design and construction of a house could be subject to a "building action"[83] because of the width of the definition of "business practitioner". [84] They are required to take out insurance.[85] At the same time, the legislative scheme does not purport to alter common law or statutory liability of building practitioners save for:

* the limitation period of 10 years[86] which will allow actions to be brought in respect of latent defects that emerge at a time when properties are likely to be in the hands of subsequent owners;

* limiting liability of those responsible, who are found jointly or severally liable, to a just and equitable proportion of the loss or damage having regard to his or her "responsibility" for the loss,[87] and

* removing any liability to contribute, when jointly or severally liable, to the damages apportioned to any other person in the same action or to indemnify any other person in respect of those damages notwithstanding anything to the contrary in the Wrongs Act 1958.[88]

It may fairly be said that the intention of the legislation was to deal comprehensively with compensation arising out of or concerning defective building works and to spread liability equitably between all those "responsible" for the design, construction, and approval of buildings - and their insurers. Not all building practitioners at fault will necessarily be linked contractually with other building practitioners or the original building owner and none will be so linked with subsequent owners - the class of people directly affected by any defective design, construction or approval. If building practitioners are not liable in negligence to other building practitioners or to owners, including subsequent owners the above objectives will not be achieved.

* Application to building practitioners. Unless those at fault can be held liable in tort for loss and damage resulting from their want of care, the provisions limiting liability could operate unfairly against other building practitioners and their insurers; for those in breach of contract will bear more than the proportion of the loss and damage attributable to their fault.

* Application to building owners. Where there is no contractual connection with the owner who suffers the loss, and no duty of care, that owner will not recover any compensation in respect of defective design, construction or approval where the defects emerge within the 10 year prescribed period. If, however, liability to the building and subsequent owners in negligence also exists, all "responsible" for defects in design or construction will be liable to the owner who suffers the loss if they failed to perform their tasks with reasonable care - but only to the extent of their responsibility.

Thus to impose a duty of care on the private building surveyor in the circumstances of this case would assist the scheme to apply comprehensively and fairly.

The following issues raised by his Honour are also relevant and will be addressed below:

* The issue of the significance of "reliance".[89]

* The factual components of the relevant category of relationship. I will return to that issue.[90]

Counsel for the appellants also referred to subsequent decisions of intermediate Courts of Appeal which declined to extend the application of Bryan v Maloney[91]. In some instances, the Courts of Appeal went so far as to state that Bryan v Maloney should not be subject to an "extension" except by the High Court. This may prove to be the high water mark of the present cycle of judicial analysis on the issue of duty of care.[92] I assume, however, that the Courts of Appeal were referring to something more than incremental development. I do not accept the argument of counsel for the appellant that these authorities forbid a cautious incremental development beyond Bryan v Maloney, Heyman and Perre v Apand. I suggest that, consistently with the principles of the common law, the distinction to be drawn is between judicial legislation on the one hand and incremental development on the other. The superior courts, and, in particular, their intermediate Courts of Appeal, have an important role to play in that incremental development. Nonetheless, it is clear, from statements at intermediate appellate level and in the High Court, that great caution must be exercised in considering any incremental development of the law in this area. I turn to the issue of reliance.

Counsel for the appellants submitted that the majority decision in Bryan v Maloney appeared to rely in part on what has come to be described as "general reliance". Counsel referred to statements in the majority's reasons about the likely reliance of the subsequent purchaser on care having been taken by the builder.[93] Counsel submitted that general reliance had been decisively rejected as a relevant concept or principle in Pyrenees Shire Council[94]. Counsel submitted that it was clear from the statements in Bryan v Maloney[95] that the majority in that case required, as a feature of the relationship of proximity, a known reliance or dependence and an assumption of responsibility. Counsel submitted that the references to "known reliance" were reference to the concept of "general reliance" which was relied upon by Mason J in Sutherland Shire Council v Heyman.[96]

There are two aspects to counsel's argument. The first is the proposition that the majority in Bryan required "known reliance" before the necessary relationship could arise.

It is true that on several occasions, the majority in Bryan refers to the assumption of responsibility and "known reliance" in combination but it did so in dealing with the particular class of relationship. On the facts of the particular case, it in essence was saying that both factors were present. In formulating the principle to be applied, however, they made it quite clear that what was required was one or the other.

They referred to the policy considerations that militate against recognition of proximity to give rise to a duty of care, namely, the problem of an indeterminate amount for an indeterminate time to an indeterminate class on the one hand and the consideration that in a competitive world one person's economic gain is commonly another's loss and that to find a duty of care may be inconsistent with what is ordinarily legitimate in the pursuit of personal advantage. They then commented that the combined effect of those two distinct policy considerations was that:

"The categories of case in which the requisite relationship of proximity with respect to mere economic loss is to be found are properly to be seen as special. Commonly, but not necessarily, they will involve an identified element of known reliance (or dependence) or the assumption of responsibility or a combination of the two."[97] (my emphasis)

In later passages the majority clearly indicate that they regarded both as being present as between builder and building owner and builder and subsequent purchaser. In referring to the situation of the subsequent purchaser, they commented as noted above that a builder would be aware that a subsequent owner would be likely to assume that the house had been competently built and that the footings were in fact adequate unless the inadequacy of the footings had become manifest. They also commented that the situation was one where there was a likely reliance on the part of the owner.[98] It is clear, however, that known reliance was not regarded as the essential factor in identifying the class of person to whom a builder would owe a duty of care - assumption of responsibility or known reliance or both would be relevant. This is consistent with other High Court decisions involving alleged negligence by persons with expertise who undertake to perform some service using that expertise.[99]

The other aspect of the argument concerns the rejection of the concept of general reliance in Pyrennes Shire Council.

I accept the submission of counsel for the Taitapanuis that the concept discussed in that case was general reliance in the sense of a general community dependence on an authority performing its functions with due care. In my view, however, Bryan v Maloney did not concern "general reliance". It concerned a different concept, "known reliance". It also concerned a different context - whether the defendant builder should have been aware that it would be likely that a subsequent purchaser would assume that the house had been competently designed and built and the footings were adequate. Thus in Bryan v Maloney, the majority addressed the issue of reliance within the framework of the classic definition of the "neighbour", in the course of determining what a defendant ought to have considered and ought to have been aware of, rather than relying on any proposition of policy that community dependence should give rise to a duty of care. The issue was considered by Kirby J in Pyrennes Shire Council.[100] His Honour commented:

"Some passages in the reasoning of the majority opinions in this Court in Bryan v Maloney might be read as suggesting adoption of the 'general reliance' theory.[101] That case concerned a claim in negligence by a subsequent purchaser against a professional builder for cracks later discovered. There had been no actual contact between the parties to the proceeding. There was therefore no room for an imputed, but actual, reliance. Nevertheless, as I read the decision, Bryan did not ultimately turn on a rule of 'general reliance'. There is therefore, no holding of this Court on the subject."

Duty of care - applying the reasoning of Bryan v Maloney

Applying the majority reasoning in Bryan v Maloney, a private building surveyor exercising reasonable care should have foreseen that, in assuming the responsibility that he did, a failure to exercise reasonable care could cause serious economic loss to the original owners who engaged him and to subsequent owners. He would or should have foreseen, in particular, that, if inappropriate foundations were used, it was likely that some time in the future defects would emerge and have an impact on the value of the property in the hands of the person who then happened to own it. Critically, the private building surveyor assumed the responsibility to determine whether a building permit would be granted and to inspect critical stages of the building. Apart from his contractual obligation to exercise reasonable care in performing his contract, he owed a duty of care to the original owners. He would or should have known that a subsequent owner was likely to assume that the house had been competently built and the foundations adequate unless the inadequacy of the footings had become manifest. Finally, the economic loss was of the same kind and the house provided the connecting link to the original relationship - if that is required.

Much was said by counsel for Moorabool and Mellis about the fact that the Taitapanuis could have protected themselves by having the property inspected by experts. They argued that such failure bore on the issue of duty of care. As appears from Perre v Apand,[102] the inability of a class of plaintiffs to protect themselves can be a factor which adds to their "vulnerability" and so supports the imposition of a duty. On the other hand, the ability of a class of plaintiffs to take steps to protect themselves may result in the denial of a duty of care, at least in a commercial context.[103] But that will not always be the case. Applying the reasoning of Bryan v Maloney to this case, a failure to engage experts to inspect would not have the result that duty of care did not arise. In Bryan v Maloney such a possibility of inspection also existed and Mrs Maloney did no more than visually inspect the property herself. Despite the extremely detailed and thorough analysis of the issues, the opportunity to inspect the dwelling, or have it inspected, was not discussed in that case as a consideration relevant to the existence of a duty of care in that case.

Counsel for the appellants challenged the decision of the Tribunal in the way it relied on the statutory scheme. I have referred above to the reasoning of the Tribunal on this aspect. I am inclined to agree with the appellant's argument that the statutory scheme was not the main salient feature to be considered. But it is plainly a significant salient feature. I do not, however, accept, as argued for the appellants, that the Tribunal reasoned that merely because a private building surveyor had to be insured he or she might owe a duty of care to the building owner. The Tribunal was making the point that the requirement of insurance was an important part of a comprehensive statutory scheme designed to ensure that all building practitioners responsible for defective building work could be held accountable. The statutory scheme also assumed that a private building surveyor could have potential liabilities that should be insured and that such liabilities could exist into the future for 10 years.

Counsel for the appellants also submitted that the scheme of builder warranties that run with the building under the Act and Domestic Building Contract Act 1995 pointed to the scheme being one directed to giving protection to building owners against builders and, therefore, did not advance the argument for the imposition of a duty of care. The warranty scheme, however, was introduced by the Domestic Building Act 1995 which in turn included amendments to the Act. They did not reduce the scope of that Act. Rather they added to the protections provided by it. Thus the Act plainly envisages actions involving not only builders, but also designers and private building surveyors. The argument also ignores other features of the legislation such as s 131 of the Building Act which makes defendants to building actions liable only to the extent of their responsibilities. The statutory scheme is not inconsistent with the alleged duty. On the contrary to hold that the private building surveyor, in a case such as the present, owed a duty of care to a subsequent purchaser would help secure the intended comprehensive and fair operation of the statutory scheme.

Counsel for the appellants also submitted that the Tribunal erred in the conclusion it reached on the issue of vulnerability. Counsel submitted that the test was whether the Taitapanuis had little or no capacity to protect themselves. Counsel further argued that the Taitapanuis had the means to protect themselves by having an expert conduct a pre-purchase inspection. They also argued that the Tribunal ignored the availability of statutory warranties, covered by insurance, in determining whether the Taitapanuis were vulnerable.

In my view the authorities do not support the narrow concept of "vulnerability" advanced by the appellants. Insofar as the appellants relied upon Perre v Apand, it must be borne in mind that in that case the defendant had not assumed responsibility to others in the way that the defendant did in Bryan v Maloney, Hawkins v Clayton and Hill v Van Erp. "Vulnerability" is a broad concept. Reference should be made to the majority judgment in Woolcock[104] in which the concept of "vulnerability" is discussed. Their Honours treat as coming within that concept not only situations where plaintiffs are unable to protect themselves from the consequences of a defendant's want of reasonable care (either entirely or at least in a way which would cast the consequences of loss on another) but also

* situations where the defendant has assumed responsibility and there is "known reliance"[105] and

* the negligent misstatement cases, where central to the plaintiff's allegation is the contention that the defendant knew that the plaintiff would rely on the accuracy of the information provided by the defendant.

Their Honours comment that the two latter examples can be explained as suggested by Professor Stapleton by reference to notions of vulnerability.[106] Their Honours declined however to attempt to "identify or articulate the breadth of any general proposition about the importance of vulnerability". I suggest that it is clear from the majority judgment that the concept of "vulnerability" is much wider than the concept put forward by counsel for the appellants.

As to the use of the concept of "vulnerability", the recent authorities refer to "vulnerability" for the purpose of identifying a limited class of plaintiff whom, to quote Lord Atkin, the defendant "ought reasonably to have ... in contemplation as being ... affected" by his "act or omission". It is, however, a name for a category and does not exclude other relationships with other features and its own definition is yet to be finalised. The concept may be used to define a neighbour relationship sufficient to warrant the imposition of a duty of care to the plaintiff by requiring, for example, that it be shown that the plaintiff belonged to an identifiable class of people at risk of economic loss as a result of the negligence of the defendant and that it was reasonably foreseeable to the defendant that they either could not protect themselves or there was a likelihood that they would not do so. So articulated, the issue whether particular plaintiffs could have protected themselves remains relevant to the defence of contributory negligence but not to the question of the existence of a duty.

It follows, I suggest, that the issue whether the Taitapanuis could have protected themselves was not relevant to the duty of care question. In fact, to deny a duty of care on the basis that the plaintiffs failed to take steps to protect themselves would, in fact, be to re-introduce the last opportunity rule and would be contrary to s 26 (1)(a) Wrongs Act 1958 - in particular, the opening portion which has been repeated over the years in the various forms of that section as follows:

"Where any person suffers damage as a result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, . . ."

In any event, the Tribunal made no finding as to whether the Taitapanuis had the means to protect themselves. This is understandable because the evidence was unclear as to what systems of inspection were available in Torquay when they bought the property, its likely cost, how rigorous the inspection needed to be or the likelihood of the person inspecting the premises to have the knowledge and expertise required to identify the problems. As noted above, however, there was evidence, that the Taitapanuis had to call in three experts before they found one who had the necessary expertise to identify the problem.

There was no evidence to suggest that there was anything that they should have seen that might have caused them concern. There was also no issue raised as to whether contractually they might have been able to protect themselves and so pass the loss back to the defendant - or some other person.

As to the warranty system relied upon by the appellants it did not provide full protection, inter alia, because the compulsory insurance supporting it could be capped at $100,000.[107]

For these reasons, the above arguments of the appellants on the issue of vulnerability are not made out.

Developments since the hearing - Woolcock St Investments Pty Ltd v CDG Pty Ltd & Anor[108] (Woolcock)

At the time of the hearing of this matter it was known that Woolcock had been heard in the High Court and a decision was likely in the near future. On 1 April 2004 the decision of the High Court was handed down. I invited the parties to make further submissions in light of the decision.

In Woolcock, the first respondent, CDG, carried on the business of consulting engineers. It had designed foundations for a warehouse and offices in Townsville for the original owners of the land. The land on which the building was to be built was owned by the trustee of a property trust. Some years later, the building was sold by the then trustee of the property trust to the appellant Woolcock. That contract contained no warranties as to defects or the assignment of any rights the vendor might have had in relation to defects. Prior to purchasing the property, Woolcock did not have the building inspected and made no inquiries about structural defects. A little over a year after the purchase by Woolcock, it became apparent that the building was suffering substantial structural distress. It was common ground that this was due to settlement of the foundations or the materials below them, or both. Another material consideration was that the original owner of the land had refused to pay for geo-technical investigations which had been suggested by the first respondent. The first respondent had in fact obtained a quotation for that purpose. As a result no such investigations took place prior to design and construction. The issues arose for decision in the context of an appeal from a case stated. The decision is relevant to the resolution of this matter in several ways.

The decision in Bryan v Maloney was considered and discussed. It was not overruled or distinguished, for example, on the basis that the defendant building practitioners in Woolcock were engineers as distinct from builders. Rather, the decision appeared to be accepted.

The majority expressed the ratio of Bryan v Maloney in the following terms -

"In Bryan v Maloney, the Court . . . decided that the builder of a dwelling house owed a subsequent purchaser, Mrs Maloney, of the house a duty to take reasonable care to avoid the economic loss which the subsequent purchaser suffered as a result of diminution in the value of the house when the fabric of the building cracked because the footings were inadequate."[109]

In Woolcock, the majority referred to what in its view was the reasoning employed in Bryan v Maloney and compared that to the case before it. It noted the following aspects of the reasoning.

First, the majority stated that there was nothing in the building contract in Bryan v Maloney to preclude the existence of a duty of care owed by the builder to the first owner to avoid injury to her person or property but also "mere economic loss of the kind ultimately sustained" when the inadequacy of the footings became manifest. The majority said[110] that that was because, as stated in Bryan v Maloney,

"the ordinary relationship between a builder of a house and a first owner with respect to that kind of economic loss is characterised by the kind of assumption of responsibility on the one part (ie, the builder) and known reliance on the other (ie, the building owner) which commonly exists in the special categories of case in which a relationship of proximity and a consequent duty of care exists in respect to pure economic loss."[111]

The majority in Woolcock stated that four considerations were then identified in Bryan v Maloney as warranting the conclusion that a relationship of "proximity" existed with the subsequent owner. They were stated to be:

* The house was a connecting link, being a permanent structure and a significant investment for a subsequent owner like the respondent.

* It was foreseeable that economic loss would likely result from negligent construction of the house.

* There was no intervening negligence or other causative event.

* The similarities with the relationship between the builder and first owner in relation to the particular kind of economic loss were of much greater significance than the differences, namely, "absence of direct contract or dealing and the possibly extended time in which liability might arise".[112]

The majority then went on to state that the decision in Bryan v Maloney "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.[113] The majority then concluded:

"Both this anterior step, and the conclusion drawn from it, were considered in the context of the facts of the particular case - in which the building in question was a dwelling house. The propositions about assumption of responsibility by the builder and known reliance by the building owner were said to be characteristic of `the ordinary relationship between a builder of a house and the first owner' (emphasis added). At least in terms, however, the principles that were said to be engaged in Bryan v Maloney did not depend for their operation upon any distinction between particular kinds of or uses for buildings. They depended upon considerations of assumption of responsibility, reliance and proximity. Most importantly, they depended upon equating the responsibilities which the builder owed to the first owner with those owed to a subsequent owner."

After referring to criticisms of Bryan v Maloney, in particular its dependence upon the concept of "proximity", the majority referred to a number of authorities dealing with claims for economic loss in the course of which it appeared to give approval to Bryan v Maloney - at least as to its outcome and the reliance in that case on the notions of assumption of responsibility and "known reliance".[114]

McHugh J addressed the issue of the ratio decidendi of Bryan v Maloney. He stated after detailed analysis that it could:

" ... be put no higher than that the builder of a dwelling house owes a duty to a subsequent purchaser to take reasonable care to avoid reasonably foreseeable decreases in its value arising from the consequences of latent defects caused by the house's defective construction."[115]

"Neither the stated reasons of the Court nor the material facts of the case justify any wider conclusion. Certainly they do not justify the conclusion that the ratio of the case covers commercial premises.

A little later he stated that the ratio of Bryan v Maloney was:

"That the builder of a dwelling house owes a duty to a subsequent purchaser who relies on the skill of the builder to protect that person from reasonably foreseeable decreases in value resulting from latent defects in the house."[116]

As to the authority of Bryan v Maloney, His Honour stated in the final paragraph of his reasons:

"Nothing in this judgment is intended to suggest that Bryan v Maloney would now be decided differently. Whether a different decision would now be reached under current doctrine almost certainly depends on whether evidence would reveal that the purchasers of dwelling houses are as vulnerable as the Court assumed in that case."

Kirby J also attempted to identify the ratio of Bryan v Maloney stating that it:

"is concerned, and concerned only, with the duty of a builder (or like person) to subsequent purchasers of a dwelling house."[117]

His Honour noted that Bryan v Maloney both had its critics and its defenders, the latter viewing Bryan as:

"conformable with other developments of the law of negligence as elaborated by this Court including the protection of the vulnerable. Indeed the decision in Bryan is one of those described by Professor Stapleton as `fit[ting] well within the Atkinian mould of successful tort law making [which is] the envy of tort commentators abroad'. She has suggested that reversals of such decisions can be left to legislators on the basis of reports of inquiries rather than `judicial activism' instituting what she terms the `dramatic pro defendant era in tort decisions' in this country in recent times."[118]

His Honour went on to discuss the case further and would seem to have some reservations about Bryan v Maloney. While he rejected expressly the application to overrule it, he appeared to favour modification or at least reconsideration.

Callinan J, expressed grave reservations about Bryan v Maloney but decided the appeal by reference generally to the salient features that have been identified in other authorities including Perre v Apand Pty Ltd.[119]

The result appears to be that Bryan v Maloney still stands but, as a precedent for lower courts, should be strictly confined to its facts.

In applying the Bryan v Maloney reasoning in Woolcock, the majority took the view that the relationship between the respondent and the original owner was not one in which the original owner entrusted the design of the building to the engineer under a simple contract but one where the owner asserted control over the performance of the engineer's work. It also noted that the appellant did not allege an assumption of responsibility by the respondents and did not allege known reliance by the original owner on the respondents.[120] They held that a duty of care to the original owner had not been made out.[121] The majority also concluded that the appellant was not:

"in any relevant sense vulnerable to the economic consequences of any negligence of the respondent in their design of the foundation for the building."[122]

They also referred to the fact that there was no warranty of freedom from defect included in the contract when the appellant bought the land and no assignment of any rights by the vendor that it might have had against third parties and the absence of any facts about whether such terms could have been sought and obtained. They also noted that it was neither alleged nor agreed that the defects complained of could not have been discovered.[123] McHugh J identified vulnerability as the key issue in the case and explored the opportunities open to first owner and purchasers of commercial buildings to protect themselves against economic loss arising from the condition of the building. The discussion focussed on contractual protection and protection by expert examination.[124] This reasoning would appear to apply to all subsequent purchasers of commercial premises. Plainly, Callinan J took the view that the subsequent purchasers were not a vulnerable class.

As I have stated, the narrow ratio of Bryan v Maloney still stands and binds. In addition, the reasoning identified from it by the majority in Woolcock appeared to receive its approval.[125] It is therefore relevant to be considered in analysing the duty of care question in this case. As to that, counsel for the Tatapanuis submitted that the four factors referred to by the majority as relied on to establish the requisite relationship apply in the present case. Counsel further argued that whether the approach of the majority or that of McHugh or Kirby JJ was followed, the present case fell within Bryan v Maloney as analysed in Woolcock. Counsel submitted that what was ultimately critical to the majority judgment in Woolcock was the absence of a duty between the defendants and the original owner, the original owner having refused to pay for additional investigation. Secondly, there was the lack of vulnerability of subsequent purchasers in what was a commercial dealing.

I agree that these matters appear to be critical to the decision of the majority but it seems to me that the second point had particular, and probably overriding, significance because of the fact that the parties involved were commercial organisations engaged in purely commercial activities.

Counsel for the appellants submitted that the majority in Woolcock distinguished Bryan v Maloney on the basis that in Woolcock there was no suggestion that the consulting engineers owed a relevant duty of care to the original owner and that subsequent purchasers were not vulnerable - being able to protect themselves. Counsel submitted in relation to the judgment of McHugh J that his Honour distinguished Bryan v Maloney on the basis that it did not apply to commercial premises and further held there was no duty, principally because of the capacity of subsequent purchasers to protect themselves with the result that they were not vulnerable.

At a glance

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Judgment (324 paragraphs)

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Legislation Cited (16)

Cases Cited (19)