No duty of care owed to apartment owners

Owners Corporation Strata Plan 72535 v. Brookfield [2012] NSWSC 712

The Owners Corporation of a strata title development comprising 52 residential apartments and penthouses alleged that the builder (Brookfield) and developer (Hiltan) owed it, and breached, both warranties implied by the Home Building Act 1989 (NSW) (HB Act) and a common law duty of care. It sought damages for alleged breaches of those contractual and common law duties.

The defendants applied to have the following legal questions determined by the Court at a preliminary stage (so as to avoid the necessity of a full hearing if the questions were determined in their favour):

1. Whether the Owners Corporation was entitled to benefit from the statutory warranties implied under the HB Act against either Brookfield or Hiltan;
2. Whether either of Hiltan or Brookfield owed the Owners Corporation a duty of care.

In relation to the first question, Brookfield argued that the warranties contained at section 18B of the HB Act were not available to the Owners Corporation because the development was adapted for commercial use as tourist, holiday or overnight accommodation.

Ultimately the presiding judge, Justice McDougall, rejected this submission, noting that the language of the statutory warranties suggested that the application of section 18B is to be determined at the time the contract was made. After considering the contract plans and specifications, his Honour concluded that the development was designed as a residential apartment complex and its 52 residential lots were designed for use as dwellings. The design & construct contract was, therefore, a contract to do residential building work and warranties were thus implied into it.

From a jurisprudential point of view, the more interesting aspect of the judgment was the Court’s rejection of the common law duty of care contended for by the Owners Corporation despite its finding that the complex was a residential development. Although the courts have been reluctant to formally acknowledge as much, the trend of previous decisions indicated a bias (although short of a “bright line”) in favour of duties in the residential context because the owners of dwellings are generally considered “vulnerable” to a builder’s want of reasonable care.

Counsel for the Owners Corporation argued that the High Court in Bryan v. Maloney (1995) 182 CLR 609 (Bryan) recognised the existence of a duty of care between a builder and a subsequent owner of residential premises. Furthermore, relying on Woolcock Street Investments Pty Ltd v. CDG Pty Ltd (2004) 216 CLR 515 (Woolcock), counsel submitted that the Owners Corporation was “vulnerable” because the operation of the Strata Schemes Management Act 1996 (NSW) meant, in substance, that ownership of common property was foisted on it without any opportunity to consider whether or not to accept the burden of defective work and ongoing repair and maintenance.

For the defendants, it was argued that:

1. Bryan was of a special category and could be limited to its facts; and
2. Bryan and Woolcock made it clear that the analysis of the relationship between the original owner and builder must first be carried out: if no duty of care was found to exist within that relationship, then there could be no duty owed to subsequent owners.

Justice McDougall held that neither Brookfield nor Hiltan owed the Owners Corporation a duty of care. He based his reasoning on three main points:

1. The fact that he had concluded that the Owners Corporation had the benefit of the statutory warranties pointed away from the imposition of a duty of care. His Honour said the Court should be slow to substitute its own judgment for that of the legislature where the legislature had considered, and made clear provision for, the extent of a builder’s liability to a subsequent owner.
2. The decision in Bryan depended on a conclusion that there was a sufficient relationship of proximity between the owner and builder to warrant the imposition of a duty of care. But the concept of proximity has since been discarded as the basis for imposing a duty of care (as per Woolcock).
3. In his Honour’s view, that there was no basis for finding that Brookfield owed a common law duty of care to Hiltan in the first instance because the parties had negotiated, on equal footing, a detailed contract in which each bargained for what it would give as the price for what it would receive. Applying Woolcock, there could be no subsequent conclusion that Brookfield owed the Owners Corporation a duty of care.

On the question of vulnerability, Justice McDougall said it was “questionable” whether the Owners Corporation should be considered as vulnerable in light of his conclusion that it benefited from the statutory warranties. However, he did not take the analysis any further and said this was a question for the legislature or a higher court.

This decision leaves open the question of whether a duty should be imposed in circumstances where the statutory warranty regime is held not to apply and/or the facts support a conclusion of relative vulnerabilities within the initial contractual relationship.

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