No duty of care to avoid reasonable economic loss owed by a builder to the owner or subsequent purchaser of a commercial building
Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor  HCA 36
On 8 October 2014, in a decision that will be of significance to builders, commercial property owners, building professionals and their insurers, the High Court of Australia unanimously overturned the Court of Appeal of New South Wales in finding that the builder of a serviced apartment complex owed no duty of care to the original owner or subsequent purchaser of that complex to avoid reasonably foreseeable economic loss in relation to defective building work.
In November 1997, Brookfield Multiplex Ltd (Brookfield) entered into a Design and Construct contract (Contract) with the registered proprietor of land at Chatswood, Chelsea Apartments Pty Ltd (Chelsea), a property developer, to construct strata-titled serviced apartments in levels 1 to 9 of a 22-storey development (Complex).
The Owners Corporation of the Complex (Owners Corporation) was created once the strata plan was registered with the common property of the Complex thereafter vesting in it.
First instance proceedings
The Owners Corporation commenced Supreme Court of New South Wales proceedings against Brookfield and Chelsea in November 2008, alleging that there were defects in the common property of the Complex and that Brookfield owed, and had breached, a common law duty of care to it to take reasonable care to avoid a reasonably foreseeable economic loss in having to make good the consequences of latent defects caused by the building’s defective design and/or construction. There was no breach of statutory warranty claim available to the Owners Corporation as the Home Building Act 1989 (NSW) does not apply to building work that is not of a residential nature and the common property of the Complex was used for the serviced apartments only, being of a commercial nature.
The Owners Corporation submitted that it was necessary to consider the “salient features” of the entire relationship between Brookfield, Chelsea and it, including, but not limited to whether the Owners Corporation was vulnerable, that is, whether it was unable to protect itself from Brookfield’s alleged want of reasonable care, to determine whether a duty of care arose. Relevantly, it was asserted that, as an owners corporation usually comes into existence after the completion of the work that creates the building to which it relates, that is, on the registration of the strata plan, it has no ability to either protect its position by prior examination of the common property or bargain for contractual protection in respect of the defects.
On 10 October 2012, McDougall J outlined his view that the claimed duty of care was novel and held that Brookfield did not owe the Owners Corporation such a duty as there was:
- a statutory regime under the Home Building Act that allowed for a subsequent purchaser to seek to recover from the builder in relation to defective property, but which expressly excluded developments used for commercial purposes; and
- no reason for the imposition of a duty of care to either Chelsea or the Owners Corporation where the Contract had been negotiated at arm’s length by parties of equal standing
His Honour also stated that any expansion to the obligations of parties to or affected by building contracts should be undertaken by the legislature rather than the Court, but that, if it was required to be undertaken by the Courts, it should be done by a higher Court
Accepting that implied invitation, the Owners Corporation appealed to the Court of Appeal.
On 25 September 2013, the New South Wales Court of Appeal (Basten JA, Macfarlan JA and Lemming JA) allowed the appeal, finding the Owners Corporation to have been vulnerable so as to establish a duty of care owed to it by Brookfield, in that, as it only came into existence effectively after the completion of Brookfield’s obligations under the Contract, it had not been able to either protect itself from Brookfield’s want of reasonable care generally or negotiate contractual protections as between it and Chelsea or Brookfield. In reaching this determination, the Court also found that the latent nature of the subject defects meant that an inspection of the Complex at any relevant time would likely not have revealed their existence.
Brookfield appealed to the High Court.
There were two issues to be answered by the High Court, being whether Brookfield owed a duty of care to:
- Chelsea and thereby a similar duty of care to the Owners Corporation, and, if so, the content of that duty.
- the Owners Corporation independently of the existence of a duty of care owed to Chelsea, and, if so, the content of that duty; and
On 8 October 2014, in unanimously answering “no” to both issues, French CJ, Hayne, Crennan, Kiefel, Bell, Gageler and Keanne JJ, in four separate sets of reasons, considered the interaction between the statutory schemes relevant to strata plans, the contractual arrangements between Brookfield and Chelsea and Chelsea and the subsequent owners and the concept of vulnerability.
French CJ stated:
The nature and content of the contractual arrangement [between Brookfield and Chelsea], including detailed provisions for dealing with and limiting defects liability, the sophistication of the parties and the relationship of Chelsea to the Corporation all militate against the existence of the asserted duty of care to either Chelsea or the Corporation.
His Honour went on to say that:
The responsibility assumed by Brookfield with respect to Chelsea, as initial owner of the lots, was defined in detail by the design and construct contract. Chelsea cannot be taken to have relied upon any responsibility on the part of Brookfield, and Brookfield assumed none, in relation to pure economic loss flowing from latent defects extending beyond the limits of the responsibility imposed on it by the contract. The statutory relationship between the Corporation and Chelsea as first owner meant that there was no duty of care owed to the Corporation as a proxy for Chelsea.
Hayne and Keifel JJ, also held that nature of the contractual arrangements were relevant, not only as outlined in the Contract, as between Chelsea and Brookfield, but also in the sale of land contracts entered into by the initial purchasers of the apartments, which gave rights of rectification in respect of defects in the common property to the Owners Corporation. Both the Contract and the later sale contracts contained provisions as to the quality of the work in return for payment of the price, demonstrating an ability of Chelsea and the initial purchasers to protect themselves against any lack of care by Brookfield and, in turn, a lack of any vulnerability and any common law duty of care.
Crennan, Bell and Keanne JJ agreed that the relevant contracts afforded protection against the risk of economic loss attributable to defects in construction of the Complex and that the Owners Corporation was therefore not vulnerable. Their Honours characterised the claimed damages being the Owners Corporation’s alleged failure, via the initial purchasers, to get value for money from Chelsea for its purchase of the apartments as economic loss and went on to say:
To impose upon a defendant builder a greater liability to a disappointed purchaser than to the party for whom the building was made and by whom the defendant was paid for its work would reduce the common law to incoherence. Moreover, to hold that a subsequent purchaser of a building is vulnerable to the builder so far as the risk of making an unfavourable bargain for its acquisition is concerned would involve a departure from what was held by this Court in Woolcock Street Investments.
Gageler J found that, unless a subsequent owner falls within a specific class of persons incapable of protecting themselves from the consequences of the builder’s want of reasonable care:
a builder has no duty in tort to exercise reasonable care, in the execution of building work, to avoid a subsequent owner incurring the cost of repairing latent defects in the building. That is because, by virtue of the freedom they have to choose the price and non-price terms on which they are prepared to contract to purchase, there is no reason to consider that subsequent owners cannot ordinarily be expected to be able to protect themselves against incurring economic loss of that nature.
His Honour, mirroring the comments of McDougall J at first instance, reflected on the statutory warranties implied into all residential building contracts by the Home Building Act, which extend protection for purchasers of residential properties containing previously undiscovered defects and stated that, if such legal protection should be further extended, as would be the case if a common law duty of care was held to exist, it is best done by legislation.
The High Court’s decision should provide some comfort for builders and building professionals (and their insurers) if they are sued by the owners or subsequent purchasers of commercial properties. Such comfort should include more certainty in ascertaining any relevant limitation period.
The High Court has confirmed that vulnerability of a party remains a critical requirement in the determination of whether a duty of care to avoid pure economic loss may exist, so, in the absence of an appropriate contractual arrangement or where there an inequality of bargaining power in respect of any commercial building contract, it would seemingly still remain open for a Court to determine that a separate duty of care is owed by a builder to a principal/owner. However, the onus to establish such vulnerability rests on the party asserting it and, in respect of commercial building contracts, it is hard to envisage circumstances where one party may be considered vulnerable.
Otherwise, similar statutory protection to that provided in NSW by the Home Building Act is available to owners and subsequent purchasers in relation to defective residential building work only in other Australian jurisdictions. Furthermore, there are impending changes to that statutory protection in NSW that will have the likely effect of truncating the length of any such protection, as it relates to a large number of defects, from a period of six years to a period of two years. These changes will apply retrospectively.
It is therefore doubtful that the legislature will now take steps to extend any protection to owners or subsequent purchasers of commercial properties.
This decision has likely put an end to any claims alleging the existence of a separate or concurrent duty of care in respect of defective work under commercial building contracts.
Date: 10 October 2014