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10 May 2010

Duty of care where loss is pure economic loss? Makawe Pty Ltd v Randwick City Council

by Greg Williams

In finding a duty of care for pure economic loss, the court will identify all the salient features, consider them, and then synthesise those considerations and their relative importance.

The NSW Court of Appeal case Makawe Pty Ltd v Randwick City Council (2009) 171 LGERA 165; [2009] NSWCA 412 sheds light on the way in which the courts determine whether a defendant owed a plaintiff a duty of care in circumstances where the plaintiff's loss was pure economic loss.

This case concerned a claim against Randwick City Council by Makawe, a company carrying on business as a landlord. Makawe suffered loss when the basement car park of an apartment building it owned flooded, requiring rectification works. Makawe alleged that the Randwick City Council owed it a duty of care, which it had breached. The council had approved the construction of the car park at a time when the council was in possession of information which showed that the water table in the area was at about the same level as the proposed basement floor slab.

At first instance, the District Court held that the council did not owe any duty of care to Makawe. It said that the loss claimed by Makawe was pure economic loss. In such circumstances, the questions as to whether the defendant owed the plaintiff a duty of care required consideration of the elements of control, vulnerability and reliance. His Honour concluded that in the circumstances Makawe had established neither vulnerability nor actual reliance.

Makawe appealed from that decision. The Court of Appeal dismissed the appeal, with Justice Simpson delivering the leading judgment. There were two principal issues on appeal.

1. Whether the primary judge erred in finding the nature of the loss alleged by Makawe to be pure economic loss.

The District Court relied on the High Court decision of Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; 205 ALR 522; [2004] HCA 16; BC200401482, in particular the following passage, in holding that Makawe's loss was pure economic loss:

"19. The damage for which the appellant seeks a remedy in this case is the economic loss it alleges it has suffered as a result of buying a building which is defective. Circumstances can be imagined in which, had the defects not been discovered, some damage to person or property might have resulted from those defects. But that is not what has happened. The defects have been identified. Steps can be taken to prevent damage to person or property."

The Court of Appeal upheld this reasoning. However, in her judgment, Simpson J made the following interesting observation about the ”salient features“ approach to determining whether a duty of care exists in novel cases described by Allsop P in Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 259 ALR 616; [2009] NSWCA 258; BC200907980 (at [94]):

"Given the approach spelled out in Stavar, it seems to me that to begin with a categorisation of loss as “pure economic” or not “pure economic” is to risk over-compartmentalisation. Firstly, the definition of what is, and what is not, pure economic loss has proved elusive. No clear definition has emerged. Secondly, the rationale for so categorising losses (for the purpose of determining whether a duty of care is owed) seems to have been considerably undermined."

2. Whether the primary judge erred in finding no duty of care on the part of the Randwick City Council towards Makawe.

The Court of Appeal agreed that when considering the question of whether a duty of care exists in circumstances where no established authority exists, the court should take the “salient features” approach explained by Allsop P in Caltex Refineries v Stavar at [102]–[105].

Makawe submitted that the trial judge had fallen into error, by taking a “cumulative“ approach to the salient features test, meaning that he had not considered whether there were particular factors which were of overwhelming significance, making it unlikely that the other factors needed to be satisfied. It also criticised the trial judge for focusing on (and requiring Makawe to satisfy) three elements or features, namely “control, vulnerability and reliance”. Makawe argued that in doing so, the trial judge had failed to have regard to important considerations, namely the kind of policy considerations identified by Gummow J in Hill (t/as R F Hill & Associates) v Van Erp (1997) 188 CLR 159 at 235–6; 142 ALR 687; [1997] HCA 9; BC9700701 (ie concerns about the indeterminacy of the class to whom a duty is owed, reluctance to impose a duty that would interfere with legitimate competitive conduct; and the need to resist the imposition of a duty of care that would intrude into another area of law). Makawe argued that had the trial judge taken these considerations into account, there would have been a result in Makawe's favour.

Two judges of the Court of Appeal (Hodgson JA, with whom Campbell JA agreed) agreed that Makawe had fallen into error in focusing on control, vulnerability and reliance and reasoning on the basis that these were necessary elements of a duty of care. Those two members of the court made it clear that, in their view, it was not necessary for Makawe to prove actual reliance in order to have that factor in its favour.

However, the Court of Appeal reached the unanimous view that the trial judge's conclusion was correct. When the “salient features” test was applied to the facts of this case, it led to the conclusion that the Randwick City Council did not owe Makawe at duty of care.

Simpson JA was the only judge who specifically commented on the application of the salient features test. Her Honour said (at [137], [139]):

"It is true that the authorities do no prescribe the relative importance of any of the salient features. That is precisely the point of the “salient features” test. That an order of importance is not prescribed does not mean that each does not have to be considered separately, with an eye to its relative importance in the case in question. Indeed, I can see no way that the test can be applied other than to consider each of the elements separately, with an eye to its relative importance for the circumstances of the case in question. To borrow a concept from the criminal law, once all of these salient features have been identified, and considered, the exercise involves a synthesis of those considerations and their relative importance.

It may be correct, as is suggested, that one salient feature may be of such overwhelming importance that others are unable to dislodge its impact. But that does not mean that it is not still necessary to consider all other salient features — it can not be known whether that feature is of such overwhelming importance as to have that effect unless and until it is analysed in context with all others."

This article was first published in Australian Civil Liability, Volume 6 No 10, May 2010.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.