Australia: High Court adjudicates on builder’s liability to subsequent property owners

The High Court recently handed down an important decision that has far reaching implications for builders, developers, body corporates and owners.

In Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 the High Court confirmed that the builder of a serviced apartment complex did not owe a duty of care to the Owners Corporation to avoid causing it economic loss arising from latent defects in the common property.

In reaching its decision, the High Court unanimously overturned a decision of the NSW Court of Appeal.

The facts

Brookfield constructed an apartment complex in Chatswood pursuant to a design and construct contract with the developer, Chelsea Apartments Pty Ltd. The contract included detailed provisions about the quality of the works and Brookfield's responsibility to rectify defects.

The complex constructed by Brookfield incorporated mixed use retail, a restaurant, residential and serviced apartments.

After the building was completed in 1999, Chelsea sold the serviced apartments to investors.

In early 2004, various latent defects manifested in the common property of the serviced apartments.

Under the strata plan that had been registered, the common property vested in the Owners Corporation as manager of the strata scheme and as agent for the owners of the apartments.

In November 2008, the Owners Corporation commenced proceedings against the builder for defective works in relation to the latent defects in the common areas. The Owners Corporation claimed that Brookfield was liable in negligence for breach of a duty to take reasonable care to avoid reasonably foreseeable loss to the Owners Corporation in relation to the defects.

History of the litigation

Court proceedings were initially started in the Supreme Court of New South Wales. The first judge to hear the matter, Justice McDougall, held that Brookfield did not owe the Owners Corporation a duty of care.

The Owners Corporation appealed to the Court of Appeal. On 25 September 2013, the Court of Appeal overturned Justice McDougall's decision. The Court of Appeal held that Brookfield did owe the Owners Corporation a duty of care to avoid causing loss resulting from latent defects that were structural or dangerous or that made the serviced apartments uninhabitable.

Brookfield then appealed to the High Court.

The High Court decision

The High Court allowed Brookfield's appeal and found it was not liable to the Owners Corporation.
The High Court's decision focused on the concept of 'vulnerability' in the context of the Owners Corporation's claim for economic loss.

Traditionally, to make out a claim for economic loss, a plaintiff needs to establish that it is 'vulnerable' in the sense that it is unable to protect itself from any breach of the duty of care by the defendant.

In this case, the High Court was of the view that neither the developer nor the subsequent purchasers had the requisite degree of vulnerability because they were able to protect their interests via their contractual arrangements.

The contract between Chelsea and Brookfield contained a 52 week defects liability period under which Brookfield was obliged to rectify any building defects. Further, the terms of the sale contracts between Chelsea and investors made provision for Chelsea to arrange rectification of defects for a period running from seven months following registration of the building.

The High Court held that neither Chelsea nor the Owners Corporation could be considered 'vulnerable' to any lack of care by Brookfield. They had entered into contracts that contained detailed provisions about the standard of work expected, which indicated they had the ability to protect their own interests. They could have negotiated more favourable terms in the contracts or even walked away from negotiations.

In such circumstances, the Court found there was no duty of care owed to the Owners Corporation by Brookfield in respect of economic loss arising from the latent defects.

Implications

The decision is certainly a positive for builders. By overturning the Court of Appeal's findings concerning Brookfield's liability, the High Court's decision limits the scope for subsequent property owners to successfully pursue the original builder for defects.

However, the case was determined on the basis of its own particular set of facts and the specific contracting arrangements entered into by the parties were of particular relevance to the High Court's decision. Builders should therefore not assume that they are automatically excluded from any liability to subsequent purchasers.

The reasoning in this case suggests that in claims involving subsequent property owners, a builder's position may be improved if there are detailed contractual provisions in place that govern the position on rectification of defects.

For subsequent property owners, the message is that they should obtain as much information as possible about the condition of a property prior to purchase (through searches, inspections and the like) and where possible seek appropriate contractual warranties from prior owners in relation to these sorts of issues at the time they purchase the property.

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