In Ku-ring-gai Council v Chan (2017) NSWCA 226, the NSW Court of Appeal considered the issue of whether Ku-ring-gai Council (the Council) owed the subsequent purchasers of a renovated property a duty to take reasonable care in issuing an occupation certificate to avoid their suffering economic loss as a result of the previous owner-builder’s defective building work. Ultimately the Court found the Council in its capacity as a principal certifying authority (PCA) did not owe a duty of care to avoid pure economic loss to prospective purchasers of a property when issuing an occupation certificate.

Factual Background

The purchasers, Ms Chan and Mr Cox, bought a property in Wahroonga that the previous owner-builder had renovated. The Council as PCA undertook inspections of the property in order to ascertain whether an occupation certificate could be issued. The Council did not identify any substantial or structural defects and subsequently issued an occupation certificate. However, the renovated property did in fact contain structural defects and did not comply with either the engineer’s drawings or the approved plans, all of which the certifier failed to ascertain.

The purchasers brought a claim against the owner-builder for breach of the statutory warranties pursuant to the Home Building Act 1989 (NSW) and against the engineer and the Council for breach of their duty of care to the subsequent owners.

Decision at First Instance

The primary judge held that the Council as PCA owed a duty of care to the purchasers because:

  • the purchasers had relied on the Council to exercise care and skill in issuing the final occupation certificate and were thus vulnerable
  • the Council knew that the purchasers would rely on the occupation certificate being issued, and
  • the Council would have reasonably foreseen that the purchasers would be likely to suffer economic loss if the occupation certificate was incorrectly issued and the property was not in fact fit for occupation.

Judgement of the Court of Appeal

The Council challenged the trial judge’s decision and appealed against the finding that it owed a duty of care to the purchasers.

The Court of Appeal found the Council did not owe a duty of care to the purchasers and dismissed the notion that a PCA in the Council’s position ought to have realised that the new purchasers would have relied on the fact that an occupation certificate had been issued when deciding to purchase the property.

The Court noted that an occupation certificate “does not in its terms or effect certify that building work does not, or is not likely to, contain latent defects or that the works comply with the relevant plans and specifications or the conditions of the development consent.” The role of a certifier in issuing an occupation certificate is accordingly quite limited: to look at certain aspects of the property and to see if certain criteria are met. Essentially, the certifier goes through a checklist to determine if an occupation certificate may be issued.

Furthermore, the Court dismissed the notion that the purchasers had a special vulnerability to the conduct of the Council as PCA. The Court held that the Purchasers had the benefit of the statutory warranties and “remained able by negotiating the price and non-price terms on which they purchased the property to protect themselves against the risk of economic loss presented by latent defects.” It was therefore not reasonable for the Purchasers to rely on the PCA-issued occupation certificate.

Relevance to Prospective Property Purchasers

The Court of Appeal’s decision made it apparent that PCAs are not responsible for certifying that building works do not or are not likely to contain latent defects, or that the works comply with the relevant plans or the conditions of the development consent. This significantly narrows the scope of claims that can be brought against PCAs for economic loss caused by building defects.

This case is a warning to purchasers who buy from owner-builders to ensure that comprehensive purchasers’ building inspection reports are carried out and if there are any doubts as to whether the property was properly built, there will not be any home warranty insurance for an owner-builder. Consequently, there is a strong probability that the owner-builder may go insolvent and thus the purchaser will not be able to rely on the certifier who issued the occupation certificate to rectify the defects and pay damages for other loss.

Essentially, when buying from an owner-builder, an occupation certificate will not hold much value as it does not indemnify the purchaser in respect of latent defects that may later be found.

This article was written by Gary Newton, Partner and Khushaal Vyas, Law Clerk at HWL Ebsworth.