An Analysis of the Woolcock Street Investments Case - Assignment Example

?Reviewing the “Duty of Care” Doctrine: An Analysis of the Woolcock Street Investments Case 2004) 216 CLR 515 Woolcock Introduction What happens when an individual buys an already-constructed property from the original owner, and only six months after, the property is found to be defective and the defect is because of design errors by the builder of the original owner? Can she still sue the builder? Is a builder is liable for pure economic loss to purchasers of commercial properties. What is the the doctrine of “duty of care” and who does it apply to? These are the interesting questions raised by the case of Woolcock Street Investments. This essay begins by laying down the facts of the case at hand, it will then proceed with an analysis of the decision made by the High Court of Australia, the prior rulings (meaning, how did the courts decide in the older cases), and finally, providing a discussion on the important policy implications arising from the case, especially insofar as it relates to the liability of design professionals and builders on commercial properties. Brief Background on the Case This case began in 1987 when the Eagle Star Nominees, Inc., designated as trustees for the BSL Growth Trust Company, engaged a company doing engineering work to design foundations for a warehouse and offices in Townsville. When the building’s construction had been finished, the trustee Eagle Star then decided to sell the property to the plaintiff. In the contract of sale, there was no warranty indicating that the building had no defects. Likewise, the buyer did not conduct any building inspection, survey before purchase, or any sort of appraisal to determine whether or not the building had been constructed in an optimal manner. Also, there was no assignment in contract by the vendor of the rights to proceed against others in case of defects. Just more than a year after the property had been turned over, the defects become apparent. The building had unmistakable structural distress and this was because of how the foundations were arranged, as well as the material below the foundations. The buyer filed a case against the engineering company and its employee, stating that the company owed a duty of reasonable care in designing the foundations of the building and ensuring the safety of the premises. In response, the company said that they owed no such duty of care to the buyer and that they were not at fault, because they in fact had asked the trustee to allow them to do soil tests, however they were told that such soil tests were not necessary and to simply use structural footing sizes. A lawsuit for damages was then filed, and the main question that the courts were tasked to respond to was: “Whether or not a subsequent buyer of commercial property had the right to sue the builder for design malfunctions?” The court ruled against the buyer and ruled that the duty of care owed to a subsequent or remote purchaser by the engineer that built the foundation of the building in question does not hold when the defective building is used for commercial purposes. This means that there is no case that can be filed against the engineer by the subsequent buyer because the building was not used as a dwelling, but rather as a commercial establishment. Previous Jurisprudence It is difficult to talk about Woolcock without talking about the progenitor case, Bryan v. Maloney. [(1995) 182 CLR 609, 616–17, 623 (Mason CJ, Deane and Gaudron JJ) (‘Bryan’)]. In that case, the plaintiff was able to successfully claim damages against the builder, despite the fact that she was a subsequent buyer of a residential property and the sale was concluded seven years after the property had been built. The plaintiff had inspected the house many times before purchasing it, with no observations made that there were any defects. However, after six months, it was discovered that there were cracks on the wall and this was because the builder had constructed footings that were inadequate to withstand the changes in the seasons. The court held that the builder and a subsequent buyer had a relationship that created upon the builder a responsibility to take reasonable care to avoid reasonably foreseeable economic loss. While the court made mention of some reasons why there is a nexus between the builder and a remote buyer, including the persuasive point that if liability was restricted only to the first sale, then it might give rise to the unconscionable practice of builders entering into bogus first sales, it would appear that the most important policy considerations that the courts had looked into was the asymmetry in relationship between the builder and the mortgagor – the builder, a company that had at its disposal a team of surveyors and valuers, would have known that the mortgagor is in all likelihood unable to get a second surveyor and will rely on the upon their valuation, thus increasing the risk that serious defects would be concealed. The mortgagor therefore is in a more vulnerable position. The court elucidated on the principle of “vulnerability”, to wit – Since Caltex Oil, and most notably in Perre v Apand Pty Ltd (1999) 198 CLR 180, the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. “Vulnerability”, in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, “vulnerability” is to be understood as a reference to the plaintiff’s inability to protect itself 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 the defendant. (page 4). In non-legal terms, what the court was trying to say is that because the buyer could not protect herself/himself in the way that the builder might have, there are additional burdens imposed on the builder. This is issue of vulnerability was emphasized in the present case of Woolcock, by way of demonstrating why the present case diverges from the doctrine laid out in Bryan. Rationale for the divergence from Bryan: The principle of “vulnerability” In contrast to the facts in the earlier case, the facts here show that the builder had procured a quotation to get a geotechnical investigation for the land, but the original owner did not want to spend more money. Likewise, the original owner directed the sizes of the footing to be constructed. These details belie any indication that the original owner was in any such vulnerable position vis a vis the builder. In fact, the original owner directed and controlled the operations. A fatal error identified by the Court was that – In its pleading the appellant did not allege that the relationship between the respondents and the original owner was characterised by that assumption of responsibility by the respondents, and known reliance by the original owner on the respondents, which is referred to in the joint reasons in Bryan v Maloney (at 624). Such further facts as are agreed, far from supporting any inference that this was the nature of the relationship between the respondents and the original owner, point firmly in the opposite direction. There was not, therefore, what was referred to in Bryan v Maloney (at 619) as “an identified element of known reliance (or dependence)” or “the assumption of responsibility” (page 5) In short, because the respondent builders were not liable to the original owners, they are not liable to the subsequent owner either. To make the point simpler, for a subsequent builder to be able to claim from the builder, that builder must first be able to perform what the court calls the “anterior step” of proving that a duty of care has arisen between the builders and the original owners and there was a breach. But even between the builder and the subsequent buyer, the court held that the facts did not show that “the appellant was, in any relevant sense, vulnerable to the economic consequences of any negligence of the respondents in their design of the foundations for the building.” (page 5). The court also took it against the subsequent buyer that there was no warranty of freedom from defect in the contract of sale. Neither did the buyer require the original seller to assign her the rights to proceed against the builder for defects. While it may be true that the subsequent seller did not know that there were defects in the building before the sale was consummated, the court made a difference between “did not know” and “could not have known.” Other investigations could have been undertaken in order to assess the property and examine for possible defects. There also appears to be a distinction being drawn out between transactions involving commercial premises and transactions involving residential premises, with the courts looking more kindly upon subsequent buyers of residential premises. In the case of Fangrove [1999] 2 Qd R 236 (‘Fangrove’)] for instance, it was held that the case, call[ed] into question the very basis for the imputation of assumption of responsibility and reliance ... The purchaser of a substantial commercial building acquired for profit does not fit the description of a purchaser of a modest suburban house who ‘is likely to be unskilled in building matters and inexperienced in the niceties of real property investment’. Policy implications and issues for the future The decision in Woolcock is rife with policy implications and has consequences on the building industry, and the rights of individuals purchasing commercial properties. But first, it is important to state that, contrary to popular misconception, the Woolcock did not lay down a general principle stating that with respect to subsequent buyers the duty of care of builders attaches when the property involved is residential, but does not attach when the property involved is commercial. It is difficult to say that there are no iron-clad rules that can be teased out where the Woolcock case is concerned. The reason why is because this particular case the court had relied on the unique facts and circumstances of the case. For example, the court placed great weight on the fact that the original buyer had been in great control of the design and construction of the commercial property, and had denied the conduct of geo-technical studies even if the builder had already made quotations and had signified an intent to have these studies conducted. By way of another example, the court had also said that the new buyer could have undertaken investigations to assess the strength and durability of the building. Even if the second buyer did not know of the defects, these defects could have been reasonably foreseen if the seller had taken a more prudent course of action. The point is that these facts are peculiar to the case, and were made the basis of the decision of the court. The court weighed the facts and made a decision towards a just and equitable solution to the issue. If the facts had been different, then it is likely that the court had decided differently. It is as easy to imagine a scenario wherein the original buyer did not adopt a take-charge attitude and relied on the expertise of the builder, or perhaps a scenario wherein it was indeed a commercial establishment, but it was to be a family-owned mini-cafe – can the new buyers be said to be less vulnerable than a buyer of a residential property, if both could prove the significance of their investment and it was their first purchases? What the Woolcock case does do, and set a general principle on, is that it effectively requires first buyers to ensure that all investigations are taken and all studies are conducted to test the strength and durability of the building constructed, and that it teaches subsequent buyers to require the same when looking for properties to purchase. Failure to do this cuts the nexus between the first buyer and the builder, and effectively, all subsequent buyers. If those in the buy-and-sell business want to adhere to good industry practices, then it cannot take shortcuts. Certainly, this does not and should not encourage bogus first-sales, for the purpose of insulating builders from liability. If the connection between the builder and the subsequent buyer is cut, then the remedy of the subsequent buyer is to sue the first buyer. The selling of a property of which geotechnical studies were not adequately taken should be frowned upon. This case only looked at the vulnerability of the subsequent buyer, vis a vis the builder (because after all, only the builder was impleaded in the case). Cases that would come after this would do well to also look into the vulnerability of the subsequent buyer vis a vis the original buyer, and the asymmetric relationship between both. To quote from Carver (2005): The effectiveness of vendor warranties as to structural soundness or the absence of latent defects as a means of protection, apart from hinging on issues such as the vendor’s future solvency, depend on their ability to be contractually provided or negotiated in practice. For what incentive do vendors have to warrant against defects of which they have little, if any, prior chance of discovering or protecting against, unless they are also part of a chain of contractual warranties linking themselves to either prior vendors or builders? Indeed, what the decision does is that it gives an incentive to vendors to warrant against defects, and buyers to ask for them. At the end of the day, this strengthens buyer confidence and reinvigorates the real property market. It should also be discussed what happens when a previously-commercial property becomes residential property later on, or the other way around, i.e., residential property is made into commercial property. What is the liability of the builder on the subsequent seller, given the shift? And also, if the property is a residential one, how many buyers can claim from the builder, particularly if the “vulnerability” test had been passed? Another policy implication of the case, albeit perhaps inadvertently, is that it privileges buyers of residential properties over buyers of commercial properties, in that it provides an extra layer of protection on buyers of residential properties. This is based only on the presumption – if not stereotype – that buyers of residential properties are less-knowledgeable, less able to afford private experts, and therefore more vulnerable; whilst commercial property buyers have more experience and more access to technical expertise. As the world of commerce moves and changes, previous preconceived notions may no longer necessarily be true. What should be aspired for is a business environment where buyers have confidence in their real estate investments, where contracts are upheld, where defects are detected by thorough investigation and accounted for by the party responsible for such a defect. References Bryan v. Maloney. (1995) 182 CLR 609, 616–17, 623 (Mason CJ, Deane and Gaudron JJ) (‘Bryan’). Fangrove v. Tod Group Holdings Pty Ltd.  [1999] 2 Qd R 236 (‘Fangrove’)] Woolcock Street Investment Pty Ltd v. CDG Pty Ltd. (2004) 216 CLR 515 (‘Woolcock’) Carver, T. (2005) “Beyond Bryan: Builders’ Liability and Pure Economic Loss.” Melbourne University Law Review. 2005 (MULR) 8. Available at http://www.austlii.edu.au/au/journals/MULR/2005/8.html#fn1 Read More