By George Hayek- Director & Peter Bijjani- Lawyer
The New South Wales Court of Appeal, in the matter of Ku-ring-gai Council v Chan  NSWCA 226, confirmed that a principal certifying authority (PCA) does not owe a duty of care to avoid pure economic loss to prospective purchasers of a property when issuing an Occupying Certificate (OC). The judgment handed down by the Court confirms the duties of the PCA when issuing occupation certificates, which does not extend to ensuring that the works comply with the relevant approved plans nor that latent defects are identified or considered for the purposes of issuing the OC.
Mr Acres and his former wife had owned a dwelling house in Wahroonga (Property) and had undertaken significant renovations and extension as owner-builder in 2008-09. The works included to construct an extension to the Property whereby Ku-ring-gai Council (Council) were retained as the PCA under the Environmental and Planning and Assessment Act 1979 (NSW) and Mitchell Howes Civil of Structural Engineers Pty Ltd (ME) to prepare the structural drawings and from time to time to undertake inspections of the works as they progressed.
Council issued an Occupation Certificate (OC) for the property to Mr Acres even though the works were exhibited a number of structurally defects at the time of the OC, including:
- Defective construction of the lower ground floor;
- Defective construction of lower ground block walls;
- Defective construction of ground floor structural framing;
- Defective construction of the ground floor external walls;
- Defective construction of ground floor structural steel framing; and
- Defective construction of roof framing.
The subsequent owners of the Property upon the sale of the Property by Mr Acres and his wife, Ms Chan and Mr Cox (CC), first inspected the property on 27 March 2010 and obtained a pre-inspection report, which contained a general warning as to the inspection being a “visual inspection only”.
The Property was subsequently purchased by CC in 2010 pursuant to a standard contract of sale, which contained the standard form agreement and 18 special conditions. One of the special conditions included a clause that provided that CC were purchasing the property subject to all defects latent or patent and as a result of their own inquiries and inspection and not as a result of representations made by or on behalf of the vendors.
Subsequent to the purchase, the defects became apparent and that the structural defects could not have been discovered based on a visual inspection.
CC commenced proceedings against Mr Acres for a breach of the statutory warranties pursuant to the Home Building Act 1989 (NSW) (HBA), PCA and ME for a breach of their duty or care to the subsequent owners.
The Supreme Court found that the claim by CC was for pure economic loss and therefore foreseeability of that loss was insufficient to establish a duty of care. The Supreme Court required that CC had to establish vulnerability on the part of CC. In order to determine vulnerability, CC needed to show that they relied on the conduct of the PCA and the PCA assumed the reasonability. In that regard, the Court found that CC relied on the PCA to exercise care when issuing the final OC, PCA were aware of such reliance and had a responsibility to successors in title to certify the work.
Accordingly, it was established that the PCA owed CC a duty of care while performing its inspection to identify defects and if defects are found not to issue the OC. The Court also determined that Mr Acres was to be indemnified in full by the PCA Council, as a result of the PCA’s negligence when issuing the OC.
The PCA sought to appeal the Supreme Court’s decision to the NSW Court of Appeal on the following basis:
- The Supreme Court erred and a duty of care was not owed to CC by the PCA; and
- The Supreme Court erred and a the PCA should not be required to indemnify Mr Acres.
The NSW Court of Appeal, the Court agreed that CC needed to establish vulnerability. However, the Court of Appeal found that CC did not in fact establish vulnerability for the following reasons:
- CC were not reliant on the OC issued by the PCA;
- The terms within the OC do not amount to a certification that building works will not contain defects, latent or structural or that works comply with the development approved consent and plans;
- The responsibility to ensure that building work is administered within the conditions of the development consent falls upon the owner or the other person having benefit of the building work. The function of the PCA is regulatory, which includes authorising an OC and certify that the works comply with the relevant rules under the Building Code of Australia;
- The CC had the benefit of statutory warranties against Mr Acres and therefore were not vulnerable; and
- The CC were able to protect themselves by negotiating the terms of the purchase and therefore were not vulnerable.
It was held by the Court of Appeal that the PCA had no liability to indemnify Mr Acres as the PCA had not undertaken to supervise compliance as part of their retainer.
A PCA cannot be held responsible for certifying building works that contain latent defects or whether the relevant building works are compliant with relevant conditions set out in the development consent and approved plans. In order for CC to have been successful CC had to establish that it was vulnerable to the PCA, which in this case, the intervening sale contract and the availability of the implied statutory warranties under section 18B of the HBA, ensured that CC was not vulnerable to the PCA.