Does your construction contract adequately protect for financial (as distinct from property damage) loss caused by defective work or design?

It is now well-established law in Australia that a builder does not owe a duty of care to subsequent property owners for pure economic loss caused by latent defects (Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36). Economic loss is financial and monetary loss that is not necessarily linked to property damage or injury.

The United Kingdom has recently confirmed this judicial trend in Thomas & Anor v Taylor Wimpey Developments Ltd & Ors [2019] EWHC 1134, and further limited the circumstances in which a builder will be liable in negligence for pure economic loss. In that case, the property owners pursued a claim in negligence for pure economic loss on the basis that the builder breached its duty of care to exercise due skill and care in the construction of defective retaining walls. The Court held that a builder will not have a duty to compensate a subsequent owner for the cost of rectifying defective works because damages for ‘pure economic loss’ (where no damage is caused to property or persons) cannot be recovered by a subsequent owner in a claim for negligence.

Whilst not binding in Australia, this decision serves as a stark reminder of the current state of the law and the importance of ensuring that your construction contracts are properly drafted to adequately protect and define a contractor’s liability regarding defects.

To ensure that off the plan purchasers, subsequent purchasers, tenants and the like, are adequately protected, we recommend that construction contracts are amended so that:

  1. the parties’ rights (especially those belonging to Body Corporates, lessees and subsequent purchasers) and liabilities regarding pure economic loss for defects are clearly defined; and
  2. the contractor is required to provide a warranty to those third parties as a precondition to practical completion.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader’s specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

Key contacts:

Stephen Pyman – Director | Principal
Christopher Rowden – Principal


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