Melisavon Pty Ltd v Springfield Land Development Corporation Pty Limited

Court of Appeal (Margaret McMurdo P and Holmes JA and Ann Lyons J)

16 September 2014

This case concerned the identification of the time when damage occurs in relation to defective construction work where the defect remains latent for a number of years. Springfield Land Development Corporation (“SLDC”) developed a residential golf course community. In about January 2000, SLDC contracted with Melisavon Pty Ltd, the appellant, which conducted the business of civil and structural engineering consultants, to design a clubhouse and surrounds. The design was completed in mid-2003 and, so it was alleged by SLDC, the work was completed in accordance with that design. It was further alleged that the design was defective in that it did not provide for adequate footings given the soil conditions and as a result of “ground heave” parts of the building have failed and have been damaged causing economic loss. On 16 June 2011 the respondent filed a claim and statement of claim alleging that the appellant negligently caused the respondent economic loss of $866,258 flowing from a latent defect, namely the appellant's negligent engineering design. The appellant defended the action claiming that the loss first occurred in 2003 / 2004 when cracking appeared in the slabs surrounding the clubhouse and the action was barred by the Limitation of Actions Act. It was not in doubt that in 2003 / 2004 the cracks were identified and it was surmised that they had been caused by ground heave although various causes of the ground heave were considered such as inadequate drainage or overwatering around the building. The appellant brought a summary judgment application on the basis of the Limitation defence but was not successful at first instance. It appealed claiming that SLDC’s cause of action was complete and had accrued when the cracking first occurred and appeared, being well prior to six years before the action was commenced.

The President (with whom Ann Lyons J agreed) took an approach which focused upon the existence of knowledge (actual or constructive) of the link between the manifest damage and the cause of the latent defect in the building (ie negligent design). This, the President described as being an “orthodox approach” in line with the decision in Pullen v Gutteridge Haskins & Deavey Pty Ltd. Her Honour said:

“The preceding discussion of the relevant cases shows that for the purposes of s 10(1)(a) Limitations Act, the respondent's cause of action, which is at least arguably solely for economic loss, arose when it suffered economic loss, that is, when the latent defect, the alleged negligently engineered design of the clubhouse, first became known or manifest in the sense of being discoverable by reasonable diligence. That is because it was only then that the respondent suffered an actual diminution in the market value of the clubhouse.”

Her Honour later said:

“Until the High Court says otherwise, the cause of action in the present case was complete when the respondent suffered economic loss, that is, when the respondent had actual knowledge of the appellant's faulty engineering design or when the faulty design itself became manifest or could be discovered by reasonable diligence.”

Holmes JA (who dissented) would have allowed the appeal adopting, what her Honour said, was the “conventional approach”. That being one which accepts that a cause of action for negligence may expire before a plaintiff is aware of the existence of the right of action. Her Honour posed the question as being, “whether, when there is physical damage emanating from a latent building defect, the cause of action in a claim for economic loss arising from the defect accrues on the appearance of the damage or only once the damage is traceable to its source by the application of reasonable diligence?” Her Honour adopted the approach that the question had been settled by the decisions of the High Court in Sutherland Shire Council v Heyman, Hawkins v Clayton and Bryan v Maloney, being that the economic loss first occurs when some actual adverse consequence of the negligence is known or becomes manifest and, in the case of buildings, that is when there is consequent damage to the fabric of the building. In other words her Honour held that, “upon evidence of an underlying defect emerging in the form of physical damage, such as cracks, any resulting economic loss is then sustained, whether or not that damage is then capable of being attributed to the defect.” That, she said, was the conventional approach that the cause of action accrues where actual damage caused by latent defect is manifested or the existence of the defect is known or ought to be known. It was not necessary that the link between the latent defect and the manifestation of the damage is known or ought to be known.

In the result the appeal was dismissed.