The NSW Court of Appeal recently held that a builder was liable in negligence to a body corporate of commercial premises for defects which posed a risk to health and safety, despite there being no contractual relationship between the body corporate and the builder and the body corporate not being in existence at the time of construction.
The Chelsea Apartments at Chatswood comprise 9 floors of serviced apartments and 12 floors of residential apartments ('development').
Multiplex was engaged to design and construct the development. The developer had also entered an agreement with three separate Stockland entities under which the serviced apartments could be sold to investors by Stockland, which continued to manage the serviced apartment business.
The development comprised a separate body corporate for the served apartments ('Owners' Corporation') from the rest of the development.
Numerous defects became apparent to the Owners Corporation, and it brought proceedings against Multiplex. As the Owners' Corporation did not have any contract with Multiplex, the proceedings were based in negligence and the claim was for pure economic, being the cost of rectification of defects. The defects were not from design but from faulty workmanship and materials not in accordance with the plans and specifications.
The Owners' Corporation conceded that it was not entitled to the benefit of statutory warranties under the Home Building Act (HBA) due to the exclusion of serviced apartments from the definition of 'dwelling'.
Decision of McDougall J at first instance
At first instance in Owners Corporation Strata Plan 61288 v Brookfield Multiplex  NSWSC 1219 ('Brookfield No. 2'), Justice McDougall of the NSW Supreme Court determined the existence of a duty of care as a preliminary question.
In considering the issue, McDougall J explained that the statutory warranty scheme under the HBA excluded buildings which were always intended to be used for commercial purposes. His Honour reasoned that the Owners' Corporation was therefore "inviting the courts to go where the legislature did not".
McDougall J observed that the exclusion of dwellings used for commercial purposes (including overnight accommodation) from the HBA represented a "considered decision by the legislature that the benefits of the regime established by the HBA should not be extended to those who construct, for commercial rather than purely residential purposes".
Accordingly, His Honour rejected that a common law duty of care should be imposed primarily because the legislature "appears to have withheld as a matter of deliberate policy choice". McDougall J decided that it was therefore not necessary to consider the concept of vulnerability.
Court of Appeal decision
The New South Wales Court of Appeal allowed an appeal by the Owners' Corporation.
Analysis of authorities
Basten JA gave the primary judgment of the Court, which reviewed the development of the law in relation to liability for pure economic loss, stemming from Caltex Oil (Australia) Pty Ltd v The Dredge "Willemstad"  [HCA 65]; Perre v Apand Pty Ltd  [HCA 36] and Bryan v Maloney  HCA 17.
His Honour recognised the importance of 'vulnerability' as a key factor in identifying the scope of a duty of care for pure economic loss (as set out by the High Court in Perre v Apand) and noted the comments of McHugh J that "the vulnerability of the plaintiff to harm from the defendant's conduct is therefore ordinarily a prerequisite to imposing a duty".
His Honour stated that "the inability of a Plaintiff to protect itself is an element of vulnerability" and more specifically that 'vulnerability' may have three (3) aspects, namely the inability to:
- control or influence the physical event which gave rise to the loss
- negotiate a contractual arrangement imposing liability on the Defendant
- obtain insurance against the economic loss suffered
Other factors at stake in consideration of the existence of a duty of care are:
- the concept of "disproportion between the nature of the conduct and the culpability of the Defendant"
- the need to avoid the imposition of liability for "ordinary business conduct"
Basten JA also noted that Perre v Apand reflected the abandonment of the concept of 'proximity' as a "touchstone of the existence of a duty of care". However his Honour noted that the factors which were apt to be included in such an exercise remain relevant.
In considering the significance of Bryan v Maloney, it was noted by Basten JA that the majority reasoning for finding a duty of care in that case involved the following factors:
1. An element of known reliance (or dependence) or the assumption of responsibility or a combination of the two (referred to by their Honours in Bryan v Maloney as a "special" relationship).
2. Recognition that the existence of a contractual relationship as between the builder and the original owner did not preclude the existence of a duty of care for the purposes of negligence.
3. Recognition that the duty of care extended to 'economic' loss suffered by the original owner.
4. That the plaintiff was a subsequent owner of the land was not a critical factor militating against the continued operation of the duty.
Basten JA noted that two (2) factors had changed since Bryan v Maloney, namely:
- the High Court's abandonment of the concept of 'proximity' as the critical test or 'conceptual determinant' in identifying the existence of a duty with respect to economic loss
- the dismissal of the proposition that there is "a bright line between cases concerning the construction of dwellings and cases concerning the construction of other buildings".
In relation to the latter factor, his Honour noted that the plaintiff in Woolcock Street failed because it did not bring itself within the principles established in Bryan v Maloney, not because the building was a commercial building.
According to the Basten JA, the salient features in Brookfield No. 2 were the following:
- The contractual relationship between the developer and
The builder was fully aware of the arrangements between the developer and Stockland and was responsible for ensuring the registration of the relevant strata plan. The builder was also aware of the contractual arrangements by which apartments were sold. Therefore, the class of persons to which the builder may be liable was 'determinate'.
- The contractual relationship between the developer and
the entity managing the serviced apartments.
At registration of the strata plan the developer controlled the Owners' Corporation and was in a position to impose obligations on the Owners' Corporation, as vendor of the properties. The contractual arrangements between the developer and the builder and between the purchasers and the developer contained no provisions dealing with latent defects or provisions limiting liability with respect to latent defects.
- The statutory scheme with respect to strata
The provisions of the Strata Schemes Management Act vested the common property in the Owners' Corporation at registration of the strata plan and invested "principal responsibility for the management of the scheme in the Owners' Corporation". One of the key functions of the Owners' Corporation was to "maintain and repair the common property of the strata scheme"
- The statutory scheme for protection of successive
owners of residential dwellings.
The statutory protections available to subsequent owners of residential buildings, did not apply to the Owners' Corporation due to the use of the service apartments as tourist, holiday or overnight accommodation.
Errors by primary judge
The Court of Appeal unanimously held (relevantly) that:
- It was wrong to conclude that the parties' obligations
having been dealt with in detail in the contract, precluded a
finding that a tortious duty existed with respect to defects.
Basten JA noted that the contract did not "purport expressly, or by necessary implication, to exclude any liability for defects or omissions which might arise otherwise than during that period, whether under contract or under the general law".
The builder owed a duty of care to the developer, notwithstanding the superintendent's role, as the builder contracted to build in accordance with the plans and specifications and it is not reasonable, and cost prohibitive for the developer to check every detail of the work.
- There was no basis to not impose a duty of care on the ground
that such a duty affected the 'commercial basis' upon which
the builder priced its work.
- There was no basis to imply that the legislature intended, in
enacting the Home Building Regulation, to exclude a common
law duty of care outside of the regime of protection given in the
HBA to owners of "dwellings".
- Purchasers of the units were vulnerable because they could have insisted upon a contractual right as against the builder or the developer. They were also in a weaker position than the developer regarding inspections for defects or preventing latent defects.
The Owners' Corporation was in a weaker position than that of the developer and purchasers, which may have had some opportunity to carry out inspections during the course of the construction.
Scope of the duty of care to avoid pure economic loss
The Court of Appeal endorsed the view adopted by La Forest J in Winnipeg Condominium Corporation No 36 v Bird Construction Co Ltd  [1 SCER 85] that once the liability of a builder for physical damage to persons or property is recognised, it is appropriate to accept liability for economic loss, being the cost of steps reasonably taken to mitigate the risk of physical damage or personal injury.
Importantly, the scope of the duty of care imposed by the Court of Appeal was limited to latent defects which were either:
- structural in nature
- required urgent attention
- constituted a danger to persons or property in, or in the vicinity of, the served apartments
- made the apartments uninhabitable
The Court of Appeal decision once again confirmed the importance of the concept of 'vulnerability' as a requirement to establish the existence of a duty of care to a subsequent purchaser to avoid pure economic loss. Despite this, any other "salient features" of the case must be considered.
In the context of a strata title development, the ability of the Owners Corporation' or body corporate to protect itself against the harm of the defendant's conduct is typically limited due to creation of the Owners' Corporation or body corporate on registration of the strata plan and there being no ability to discover latent defects or to obtain contractual protection against the developer and/ or builder prior to creation.
The failure by purchasers to obtain contractual protection will not preclude a finding of vulnerability on behalf of the Owners' Corporation or body corporate, at least in circumstances where the sale contracts were agreed between the builder and the developer and where the builder retains a right to approve any changes to the terms of the sale contracts.
What does this mean for builders?
Multiplex has filed an application in the High Court for special leave to appeal the NSW Court of Appeal's decision.
Until the special leave application has been granted and a High Court judgment handed down, it remains unclear if this decision will apply outside NSW or how residential warranty legislation in other States will impact on the application of a duty of care on builders in other States.
However, it is now clear from the Court of Appeal decision that the non- application of the statutory warranties under the HBA in favour of a subsequent purchaser will not necessarily preclude the imposition of a common law duty of care. It remains to be seen whether a duty of care will be imposed in favour of a subsequent purchaser of a residential building to which the statutory warranties do apply.
The Court of Appeal recognised that the question of a duty of care to the subsequent owner does not arise unless it has already been established that the developer was owed such a duty. Therefore, builders should consider seeking an express limitation (either wholly or in part) of liability in tort as against the developer, with respect to defects which might arise outside of the contractual defects liability period.
If not limited, builders should be aware of potential liability for certain latent defects and obtain advice from their insurance broker as to the availability of cover against such liability.
Each case will depend on its facts, the contract, vulnerability and the salient features. If you are subject to a claim or the expense of latent defects, you should seek advice on each set of the particular circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.