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Australia – Builder Held To Owe Duty Of Care To Subsequent Owner Of Commercial Premises.

28 October, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Construction & Real Estate

 

In a landmark decision, the NSW Court of Appeal held that a builder of serviced apartments owed a common law duty of care to a subsequent owner (the owners’ corporation) to avoid causing it to suffer loss resulting from particular latent defects in the common property of the building.1


It is the first time an Australian appeal court has found a builder of commercial premises to owe a subsequent owner a common law duty of care. The decision has profound implications for builders in NSW, and perhaps those operating further afield.


In the wake of this decision, a wave of new claims by subsequent owners against builders of commercial premises is likely.

 

Background


Brookfield Australia Investments Ltd (the Builder) contracted with Chelsea Apartments Pty Ltd (the Developer) to design and build a 22 storey building containing 9 floors of serviced apartments and 13 floors of residential apartments.


The Builder achieved final completion in 1999, and soon afterwards the strata plan for the serviced apartments was registered, creating the owners’ corporation (the OC).


Various latent defects in the common property subsequently appeared. In 2008, the OC sued the Builder in negligence for the pure economic loss it alleged it had suffered as a consequence of the alleged defects in the common property.


McDougall J in the Supreme Court addressed the question of whether the Builder owed a duty of care to the OC as a separate question (with questions such as whether the Builder breached any duty and the amount the OC could recover only requiring consideration if the alleged duty was found to have been owed). His Honour held that the Builder did not owe the OC a duty of care, with the decision following in the footsteps of his Honour’s related decision that a Builder did not owe a duty of care to a subsequent owner of residential premises.2 The OC appealed.


The Decision


A three-bench Court of Appeal unanimously allowed the appeal. Basten JA delivered the Court’s main judgment.


Applicable Principles


His Honour reviewed the leading cases that have considered whether a person owes a duty of care to avoid another person suffering pure economic loss. Whilst other principles (such as the need to avoid imposing liability for ordinary business conduct) are still relevant, the ‘vulnerability’ or otherwise of the plaintiff was regarded to be the key principle to apply to determine whether a duty of care should be imposed in this context. Basten JA considered that, practically, vulnerability may have three aspects, being the inability to:

 

  • control or influence the physical events which give rise to the loss;
  • negotiate a contractual arrangement imposing liability on the defendant; or
  • obtain insurance against the economic loss suffered.

The High Court decision of Bryan v Maloney (Bryan) was also particularly relevant, with it being, in his Honour’s view, the ‘principal case dealing with the liability of builders to successive purchasers’.


In Bryan, the High Court held that a builder owed a duty of care to the subsequent owner of a residential dwelling. Whilst Bryan concerned a residential dwelling, his Honour observed that the High Court in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (Woolcock) dismissed that the High Court in Bryan had drawn a ‘bright line’ between residential and commercial dwellings. This left open the possibility of the reasoning in Bryan being extended to find the same or a similar duty of care in respect of commercial premises.


So Was A Duty Owed?


His Honour set about applying the reasoning in Bryan, having particular regard to the principle of ‘vulnerability’ rather than the principle of ‘proximity’ (this is because, after Bryan was decided, ‘vulnerability’ had taken the place of ‘proximity’ as the key principle to apply in this context). Accordingly, his Honour followed the approach taken in Bryan noting that the builder could only owe a duty to the subsequent owner (the OC) if it owed a duty of care to the original owner (the Developer).


To determine whether the Builder owed a duty to the Developer, his Honour considered whether the Developer was vulnerable. His Honour held that the Developer was vulnerable. The reasons for this conclusion included the assumption that the project, having a value of $55 million, was a ‘very significant’ financial commitment to the Developer and that the Developer unquestionably relied on the Builder’s ‘expertise, care, and honesty’ in its performance of its obligations. It was irrelevant that the Developer’s vulnerability related to its commercial interests and not to personal interests. In addition, the fact that the parties had entered into a detailed contract comprehensively governing the Builder’s and the Developer’s respective rights and liabilities did not prevent the Builder from owing the Developer a duty of care. This confirms that a commercial party may be regarded as being ‘vulnerable’ even if it enters into a contract giving itself various favourable protections (such as warranties and indemnities) with respect to the performance of the work.


Having found that the Builder owed a duty of care to the Developer, his Honour turned to consider whether the OC was also vulnerable. His Honour held that the OC was at least as vulnerable as the Developer. A key reason for this finding was the fact that the OC (having been created after practical completion) was in a weaker position than the Developer in that it could not perform any inspections at all whilst the works were being performed.


His Honour held that the suggestion that the investor purchasers of the units were not vulnerable because they could have insisted on including contractual rights against the Builder or the Developer (or both) was ‘inconsistent with the concept of vulnerability’. Further, Basten JA thought that the ability to obtain insurance potentially protecting against loss arising from latent defects should not be considered as part of determining the existence of the duty of care, but later (perhaps as part of an assessment of whether the subsequent owner contributed to its loss by not obtaining available insurance).


It is worth also noting that a key reason for McDougall J’s decision to decline to find the alleged duty of care at first instance was that the Home Building Act 1989 (NSW) (the Act) allows subsequent owners to have recourse against builders of residential property, but not commercial property. This was regarded as being reflective of the legislature’s intention not to extend remedies to owners of commercial property. On appeal, Basten JA disagreed, and ultimately opined that ‘[w] hether general law principles in tort are in any way affected by the operation of Pt 2C [of the Act] may be doubted’.


Accordingly, the Court held that the Builder owed a duty of care to the OC.


The Scope Of The Duty


Finally, his Honour considered the scope of the Builder’s liability to the OC. His Honour had regard to the fact that ‘liability for pure economic loss is seen as a corollary to the potential liability of a Builder for physical damage to persons or property’. From that base, his Honour stated that it was appropriate to accept liability for economic loss for ‘the cost of steps reasonably taken to mitigate the risk of physical damage or personal injury’ — that is loss resulting from latent defects that were structural, constituted a danger to persons or property, or made the units uninhabitable. Setting the scope of liability in those terms is intended to prevent the Builder from being liable to the OC for loss arising solely from a failure to use materials of a quality or durability specified in the contract between the Developer and the Builder.


What This Decision Means For You


Builders of commercial premises in NSW may now find themselves being called to account to subsequent owners with whom they have not directly contracted; builders in other jurisdictions may also find themselves being similarly called to account, with subsequent owners being buoyed by the prospect of their jurisdiction’s court adopting the NSW position.


Further, the Supreme Court’s decision in Star of the Sea (that builders of residential property do not owe a duty of care to subsequent owners) may now also be the subject of review in light of this case.


It remains to be seen whether the Builder will appeal the decision to the High Court. If this occurs, its decision will affect builders and subsequent owners of commercial premises in all States and Territories. Watch this space.

 

Endnotes

 

1. The Owners – Strata Plan No 61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317.
2. Owners Corporation Strata Plan 72535 v Brookfield Ltd [2012] NSWSC 712 (‘The Star of the Sea’).

 

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For further information, please contact:

 

Elisabeth Maryanov, Herbert Smith Freehills
[email protected]

 

Michael Lake, Herbert Smith Freehills
[email protected]

 

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