In the landmark decision of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36, the High Court of Australia has provided clarity as to whether a builder owes a duty of care to subsequent purchasers for the costs of rectifying latent defects that result in economic loss. The High Court unanimously set aside the decision of the New South Wales Court of Appeal and determined that the builder of an apartment complex does not owe a duty of care to subsequent owners for the costs of repairing latent defects in the building. This is essentially because the subsequent owners did not have the requisite degree of ‘vulnerability’ to establish a duty of care as they entered into commercial contracts for the purchase of units which defined the liabilities and risks of the parties.

The High Court had previously held that a builder may owe a duty of care to subsequent purchasers of residential premises in the context of claims for pure economic loss. However, it is now apparent that this duty has not been extended to purchasers of commercial property.

Facts

The builder, Brookfield Multiplex (Builder) entered into a design and construction contract with Chelsea Apartments Pty Ltd (Developer) to construct a mixed use retail, restaurant, residential and serviced apartment building. Upon the building’s completion, a strata plan was registered and the Owners Corporation was created by operation of statute (Owners Corporation) which holds the common property as agents for all owners of each of the lots in the building.

The Owners Corporation brought proceedings against the Builder to recover the rectification costs of latent defects in the common property. The Owners Corporation argued that the Builder was liable in negligence (as there was no contract between the Owners Corporation and the Builder) for breaching its duty to prevent loss to the Owners Corporation stemming from the costs of rectifying its defective building work.

This position was rejected at first instance by the New South Wales Supreme Court but upheld by the Court of Appeal which determined that the Builder owed a duty of care to the Owners corporation to avoid causing it to suffer loss resulting from latent defects in the common property which were structural or constituted a danger to persons or property in the vicinity or made the apartments uninhabitable.

Issue on Appeal

At issue for the High Court was:

  • Did the Builder owe a duty of care to the Owners Corporation which was independent to the duty of care it owed to the Developer?
  • Did the Builder owe a duty of care to the Developer and by extension to the Owners Corporation?

Held

In four separate judgments, the High Court unanimously set aside the decision of the Court of Appeal holding that for a duty of care to be imposed in novel circumstances (such as this), there must be a requisite degree of ‘vulnerability’. This required an inability to protect itself or its interests from the kind of harm suffered.

The High Court held that there was no vulnerability on the facts in this case as the contract between the Builder and Developer set out extensive rights for any defective work to be rectified. Similarly, the contract between the original purchasers and the Developer provided for a mechanism in which the Developer was to undertake any rectification work at its own costs which were identified by the original purchasers.

Accordingly, as there was no duty of care in negligence owed by the Builder to the Developer and to the original purchasers, there could be no duty of care to the Owners Corporation and subsequent purchasers.

The Court noted that while it may be argued that the original purchasers and indeed the Owners Corporation were relying on the Builder to undertake its works properly as it had no opportunity to check the quality of the Builder’s work, this did not in of itself constitute ‘vulnerability’.

In determining that the Builder did not owe a duty of care to subsequent purchasers, the court was particularly reluctant to alter the freedom of the parties to allocate economic risk in commercial relationships. The court held that the imposition of a duty of care where parties have entered into contracts which sought to define the liability of the parties was contrary to the development of the common law.

Significance of the case

This case is particularly significant for builders and developers involved in the construction of apartment complexes and multi-purpose high rises. The case highlights the importance of ensuring that your construction contracts adequately protects and defines the parties’ liability in relation to pure economic loss for latent defects.

AuthorEarl Tan

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