9 October, 2012

 

In brief

 

  • The recent decision of Owners Corporation Strata Plan 72535 v Brookfield [2012] NSWSC 712, demonstrates the New South Wales Supreme Court’s reluctance to find a common law duty of care owed by builders in situations where the claimant has the protection of legislation, constraining the application of negligence claims by subsequent owners.
  • In that case, the Court found that the builder did not owe a duty of care to successor in title of the development (the Owners Corporation) as:
    •  the Owners Corporation had the benefit of the statutory warranties; 
    • the proximity between the parties alone cannot be the basis of imposing a duty of care; and
    •  a duty of care to the Owners Corporation was dependent on finding a duty of care owed between the builder and the developer, and it would not be reasonable for a Court to ignore the parties’ bargain in a negotiated and detailed contract by parties on equal footing.

 

Domestic building contracts – contractual claims and negligence A traditional contractual structure apportions risk based on the doctrine of privity of contract. In a typical construction contract, the principal seeks single point accountability through its contract with its builder, and a builder with its subcontractors. This structure is commercially attractive because it allows for parties to assess, address and allocate known risks with identified counterparties at the time of entering into the contract; the construction industry is heavily dependent on these settled expectations.

 

The integrity of a tiered contractual arrangement can be undermined by a claim in negligence. Such claims can reapportion the risks of loss in an inconsistent manner to that set out in the contract, by permitting the joining of co-defendants and allowing the court to attribute liability with broad discretion. This position is supported by broad ranging proportionate liability legislation such as Part 4 of the Civil Liability Act 2002 (NSW). A claim in negligence may offer the claimant additional time where a limitation period for a breach of contract has been reached, and may permit a claim which may otherwise have been barred for a failure to comply with requirements included in the contract. Additionally, the amount of compensatory damages awarded may be different between a breach of contract and a claim in negligence.

 

Actions in negligence are also commonly used by persons not party to a contract under which works were constructed to claim for loss suffered. The High Court decision of Bryan v Maloney (1995) 182 CLR 609, established a common law duty for a builder to take reasonable care to avoid causing pure economic loss – being a decrease in value of a building caused by the defective construction of that building – to a subsequent owner of the building.

 

Negligence and domestic building legislation Despite a common law recognition of a duty owed by the builder to subsequent domestic building owners, the ability of the subsequent owner to rely on a claim in negligence has been modified by the introduction of state-based domestic building legislation. While domestic building legislation was ostensibly introduced for the protection of consumers purchasing a home, the line between commercial and domestic property can be blurred as the definition of a domestic property can extend to apartment developments. Accordingly, the existence of common law duty of care and its interaction with domestic building legislation is of concern to developers, builders and owners.

 

Both the New South Wales Home Building Act 1989 (NSW) and the Victorian Domestic Building Contract Act 1995 (Vic) overcome the privity of contract doctrine, and permit a subsequent owner of the domestic building to have the benefit of warranties as if that person was a party to the original contract. However, any action under the domestic building legislation is a claim for breach of warranties implied into the original contract between the builder and original owner of the building, and accordingly, does not offer a claimant many of the advantages of a claim in

 

Negligence as discussed above.

 

The interaction of common law duty of care and domestic building legislation has to date, been unclear. Brooking JA of the Victorian Court of Appeal foreshadowed the issue in Zumpano v Montagnese [1997] 2 VR 525, 527:

 

“It may be one day necessary to consider whether it is appropriate, in a case in which work has been carried out under a domestic building contract as defined, to impose on the builder the duty of care held to exist in Bryan v Maloney. For it may be suggested that the statutory regime really cannot co-exist with a common law duty of care, or at least that the existence of the statutory regime should as a matter of policy point against the imposition of a duty of care”.

 

The view of New South Wales Supreme Court

 

In the recent case of Owners Corporation Strata Plan 72535 v Brookfield [2012] NSWSC 712, the New South Wales Supreme Court considered whether, in the context of statutory protection offered by the Home Building Act (1989) (NSW) (the “Home Building Act“) , a subsequent owner of a building could establish a claim for negligence on the builder.

 

The development, a resort-style complex on the NSW central coast, was constructed and designed by the first defendant, Brookfield Australia Investments Limited (“Brookfield”), pursuant to a design and construct contract (“D&C Contract”) made with the developer, the second defendant, Hiltan Pty Limited (“Hiltan”). The successor in title to Hiltan in respect of the common property was the plaintiff, the Owners Corporation, who alleged that there were defects in the common property, and claimed that both defendants were liable for the defects under section 18B of the Home Building Act and a common law duty of care. The Owners Corporation sought damages for the alleged breaches of these contractual and common law duties.

 

The Court found that the subject matter of the D&C Contract at the time it was made was one to do with residential building work, and accordingly, the D&C Contract was considered within the scope of the warranties set out in section 18B of the Home Building Act. As the successor in title of the development, the Owners Corporation was entitled to the benefit of the section 18B warranties against both defendants, Brookfield and Hiltan, under sections 18C-18D of the Home Building Act.

 

On the issue of whether a duty of care was owed to the Owners Corporation, the Court found that no duty of care existed because: 

 

  • the Owners Corporation had the benefit of the statutory warranties;
  • the proximity between the parties alone cannot be the basis of imposing a duty of care; and
  • a duty of care to the Owners Corporation was dependent on finding a duty of care owed between Brookfield and Hiltan, and in this case it would not be reasonable for a Court to usurp Brookfield and Hiltan’s bargain in a negotiated and detailed contract by parties on equal footing.

 

In particular, it is worthwhile noting the New South Wales Supreme Court’s reluctance to find for a common law duty “over and above the available measure of protection afforded by statute, in an area where the legislature has intervened expressly to protect the rights of parties such as the Owners Corporation”.

 

The end of a common law duty?

 

The extent to which a common law duty is constrained in the context of domestic building legislation is unclear. In 2006, the Victorian Court of Appeal held in Moorabool Shire Council v Taitapanui (2004) VSC 30, 181 that a regime of statutory warranties in the Domestic Building Contracts Act 1995 (Vic) did not prevent the imposition of a duty of care upon the building surveyor to a subsequent owner. Ormiston and Ashley JJA read the statutory warranties to extend only to subsequent owners of residential property when the construction work was carried out by a builder, and held that “it is another thing altogether to conclude that the Parliament objectively intended to displace common law as it should otherwise apply in respect of the quite different conduct of a building practitioner of a another class”.

 

While the High Court decision of Bryan v Maloney (1995) 182 CLR 609 held that a builder could owe a duty of care to a subsequent owner, the High Court has also stated that the categories in which a duty of care is established with respect to pure economic loss are “special” (Sutherland Shire Council v Heyman and another (1985) 157 CLR 424). The future willingness of courts to find such a special relationship are likely to be impacted by matters of public policy as well as the overall relationship between owner and builder taking into account the owner’s vulnerability and salient features of the relationship (including:

 

  • the assumption of responsibility and known reliance of the owner;
  • the degree of foreseeability of harm;
  • the knowledge of risk and potential consequences to the owner; and
  • the degree of control the builder is able to exercise over the activity that gave rise to the injury).

 

Justice David Hammerschlag of the New South Wales Supreme Court has recently commented extra judicially on his concerns as to the complexity of defects claims in the construction industry between builders, owners corporations and developers, expressing a desire for the courts to reduce complexity and facilitate faster resolution of such claims.

 

These matters, and the willingness of the courts to preserve agreements negotiated between commercial parties of equal standing seem to underline the Court’s reluctance to find a common law duty owed by the Builder in Owners Corporation Strata Plan 72535 v Brookfield, and suggests that courts may be increasingly reluctant to offer special protection where domestic building legislation affords a measure of assistance to the claimant.

 

 

For further information, please contact:

 

Joseph Mulcahy, Partner, Ashurst

[email protected]

 

Liz Hunt, Ashurst

[email protected]

 

Kathy Ge, Ashurst

[email protected]

 

Ashurst Dispute Resolution Practice Profile in Australia

 

Homegrown Dispute Resolution Law Firms in Australia

 

 

Leave a Reply

You must be logged in to post a comment.