Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

Introduction

About a year ago, the NSW Court of Appeal unexpectedly allowed an owners corporation’s appeal, finding that a builder of serviced apartments owed the owners corporation a common law duty to take reasonable care not to cause it to suffer economic loss arising from latent defects in the building’s common property.

Late last week in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36, the High Court unanimously overturned that decision, allowing the builder’s appeal. The High Court held that the features of the case told against the builder owing a common law duty of care to the owners corporation or to the developer with whom it had contracted to design and build the apartments.

The decision will come as a relief for builders across NSW, and perhaps Australia. For developers and owners, the message is clear: risks and recourse with respect to defects need to be addressed in the contractual arrangements.

Background

The developer, Chelsea Apartments Pty Ltd, entered into a design and construct contract (D&C) with the builder, Brookfield Multiplex Ltd, under which the builder agreed to construct a mixed use building in Chatswood, NSW. Not unexpectedly, the D&C included provisions dealing with the builder’s liability to rectify defects (including a defects liability period).

The developer entered into contracts with various lot owners for the sale and purchase of the apartments, and the owners corporation (comprising the lot owners) was formed.

After the building was completed, various latent defects manifested in the common property.

The owners corporation sued the builder in an effort to recover the losses it had suffered as a result of rectifying defects in the common property of the building.

The Supreme Court dismissed the owners corporation’s case. The owners corporation appealed and was successful in the Court of Appeal.

The builder sought and was granted special leave to appeal the Court of Appeal’s decision to the High Court.

Decision

The full bench of the High Court (in separate judgments) unanimously allowed the builder’s appeal. The questions on appeal were as follows:

 

• Did the builder owe a duty of care to the owners corporation independently of a duty of care to the developer, and, if so, what was its content?
• Did the builder owe a duty of care to the developer and therefore a similar duty of care to the owners corporation, and, if so, what was its content?

At the outset, French CJ noted that the loss in this case was ‘pure economic loss’ (i.e. loss not attributable to physical damage to a person or property). Different considerations apply to cases involving economic loss (when compared with damage to persons or property). The main consideration becomes whether the suing party was vulnerable to suffering the loss for which it sued.

French CJ also noted that the special features of this case (particularly the contractual and statutory matrix) meant that previous cases could not be directly applied. Instead, reasoning by analogy to similar cases was the proper approach.

With that in mind, the Court focused on two earlier High Court decisions: Bryan v Maloney(1995) 182 CLR 609 (Bryan) and Woolcock Street Investments Pty Ltd v CDG Pty Ltd(2004) 216 CLR 515 (Woolcock). In Bryan, the High Court held that a builder of a dwelling owed a subsequent purchaser a duty of care to avoid economic loss resulting from latent defects. The present Court noted that in Bryan the duty owed to the subsequent purchaser hinged on the Court’s finding that the builder also owed the original owner a duty of care.

The Court also noted that the decision came at a time when the somewhat elusive concept of ‘proximity’ was the touchstone for finding a duty of care. That criterion has been replaced by ‘vulnerability’, which encompasses ‘the plaintiff’s incapacity or limited capacity to take steps to protect itself from economic loss arising out of the defendant’s conduct’. French CJ stated that even so, cases applying ‘proximity’, such as Bryan, are still relevant.

In Woolcock, the High Court held that a structural engineer of a warehouse did not owe a duty of care to the warehouse’s subsequent purchaser to avoid economic loss due to latent defects.

Overall, the Court considered that Woolcock fitted the facts of the current case better thanBryan did. This was because the purchasers of the serviced apartments entered into standard form contracts which were integral to the overall contractual arrangements for the development, and therefore part of the overall contractual matrix which allocated the risks of defective design and construction. This was quite different to Bryan, where the purchaser was entirely disconnected from the relationship between the original owner and the builder. Furthermore in Bryan the builder had a simple obligation to exercise reasonable skill and diligence, whereas in the present case the D&C contained ‘detailed prescriptions’ of the duties the builder owed to the developer. The current dispute was more akin to Woolcock, because as in that case it was not shown that the purchasers could not have protected themselves against the risk of economic loss from defective construction.

Looking at the salient features of the relationships between the parties (particularly the D&C between the developer and builder which went into detail about the risk of defects, and the standard form contracts between the developer and the purchasers), French CJ found that neither the developer nor the owners corporation were vulnerable. His Honour consequently found there was no duty of care owed to the owners corporation and dismissed the appeal.

Similar to French CJ, Hayne and Kiefel JJ noted that the D&C regulated in detail the relationship between the developer and the builder. The purchasers, in contracting with the developer, had the ability to protect themselves against any lack of care by the builder. They could have insisted on a contractual right against the developer in relation to defective work by the builder. In those circumstances, neither the developer nor the purchasers (and, by extension, the owners corporation) were vulnerable.

Indeed, Crennan, Bell and Keane JJ referred to McHugh J’s judgment in Woolcock which remains as relevant today as it was then:

The first owners and subsequent purchasers of commercial premises are usually sophisticated and often wealthy investors who are advised by competent solicitors, accountants, architects, engineers and valuers. In the absence of evidence, this Court must assume that the first owner of commercial premises is able to bargain for contractual remedies against the builder. It must also assume that a subsequent purchaser is able to bargain for contractual warranties from the vendor of such premises.

As a final comment, French CJ and Crennan, Bell and Keane JJ note that finding against a duty of care being owed by the builder to the original owner is not necessarily fatal to an argument that the builder owed a duty to a subsequent purchaser, but was an ‘important factor’ when considering whether such a duty could be owed. In other words, if the builder is found not to owe a duty of care to the original owner, the door may not necessarily be closed to a subsequent owner, although it will probably be a difficult argument to make out.

What This Decision Means For You

The High Court has brought some welcome clarity to this area of law as a result of its decision, but ultimately whether or not a particular relationship will give rise to a duty of care will depend on the salient features of the parties’ relationship, and in particular any contracts between the parties and any statutory overlay.

A fundamental reason for the Court’s decision was the fact that neither the developer nor the subsequent purchasers were vulnerable. They were able to protect their interests via their contractual arrangements: a failure to take that chance was not something to be fixed by the common law. The message this decision sends is that developers and purchasers need to ensure that they are protecting their rights when negotiating their contracts.

For further information, please contact:

Hamish Macpherson, Partner, Herbert Smith Freehills

[email protected]

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