Australia: Liability beyond the contract: NSW Court of Appeal expands a builder's liability for latent defects

The Owners - Strata Plan No 61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317

Potential impact on commercial developments

• The New South Wales Court of Appeal has found that a duty of care was owed by a builder to successive owners of commercial premises (in this instance, an Owners Corporation of a serviced apartment block).
• This finding is of concern to builders and developers as the duty of care sounded in damages for pure economic loss.
• While the decision is currently awaiting special leave for appeal to the High Court in 2014, there are practical steps which industry participants can take to limit their liability for latent defects.

The facts

This case concerned the construction of a mixed-use retail, restaurant, residential and serviced apartments building in Chatswood, New South Wales, under a contract between a developer and Brookfield Multiplex (Brookfield) in 1999.

In 2008, the Owners Corporation (Owners) commenced proceedings against Brookfield alleging latent defects in the commercial strata.

Prior to the hearing, the parties agreed that the Owners were not entitled to the benefit of statutory warranties under the Home Building Act 1989 (NSW) (as they were a commercial strata), and instead it brought a claim against the builder in negligence for pure economic loss.

The law

What gives rise to the duty of care?

The vulnerability of the purchasers was a key factor in identifying the scope of a duty of care for pure economic loss.

Vulnerability refers to the extent to which a purchaser is unable to protect itself/themselves from a builder's failure to exercise reasonable care.

The Owners were found to be vulnerable in that:

• the defects were latent and could not have been discovered by a purchaser exercising reasonable care
• Brookfield was aware of the standard terms of the sale contracts, and
• the developer was itself vulnerable to the acts or omissions of Brookfield (in the absence of any contractual limitation to the contrary).

Curiously, the judgment, albeit in obiter, went on to recognise the potential for:

• a concurrent duty as between the developer and Brookfield beyond that anticipated by the building contract (in the absence of clauses limiting liability for latent defects), and
• a subsequent purchaser being entitled to rights against Brookfield which were not rights held by the developer (ie. passing on better title than one had!).

What is the scope of that duty?

The scope of a duty owed by a builder to a subsequent purchaser of commercial premises is not commensurate with building in accordance with its contractual obligations.

Instead, the Court of Appeal identified three circumstances giving rise to a duty of care for a builder, to avoid latent defects causing pure economic loss:

1. Structural defects
2. Defects which constitute a danger to persons or property in the vicinity of a building, or
3. Defects which render a building uninhabitable.

These classes of latent defects are not an exhaustive list.

Mitigating risks associated with latent defects

Implicit in the decision is an assumption that a builder is best able to manage the risks associated with latent defects (in this case, such risks that are related to construction, as opposed to design issues). This is not always a reality and, as such, this decision gives little comfort to builders in a difficult market.

As a starting point, consideration should be given to the following, and even more so when related parties are both developer and builder in a project:

1. Express provisions in contracts limiting liability in negligence with respect to the developer.
2. Express provisions in contracts limiting liability for latent defects.
3. Revision of sale contracts to limit or exclude liability in negligence to subsequent purchasers.
4. Long-term subcontractor:
5. • warranties (assignable to successors in title) for latent defects which are structural, and
   • indemnities for latent defects which are structural or damages arising from defects which constitute a danger to persons or property in the vicinity of a building, or otherwise render a building uninhabitable.

As a developer, the decision gives considerable comfort as this case suggests that in certain situations liability can be passed onto the builder, in the absence of express contractual provisions to the contrary.

As a builder, the inclusion of an express provision which obliges the developer to make subsequent purchasers aware of the developer's limited rights against the builder could similarly limit that party's rights in negligence against the builder.

It is also important to note that such claims will be subject to the ten-year long stop provisions precluding building actions in New South Wales.

Finally, apportionment may be available as a defence to reduce exposure to such claims.

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.