In a unanimous decision, the High Court has overturned a
decision which had held that a builder owed and breached a duty of
care to an Owners' Corporation and was liable in negligence for
damages for pure economic loss.
The High Court has 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, this duty had
not been extended to purchasers of commercial property.
Although no duty was found to exist on the facts of Brookfield
Multiplex Ltd v Owners Corporation Strata Plan 61228 ( HCA
36), the High Court has not closed the door on the possibility of
such a duty arising, depending on the circumstances.
The buyer discovers defects
The case concerned the construction of a mixed-use retail,
restaurant, residential and serviced apartments complex. The
Owners' Corporation came into existence after the building work
was completed and upon registration of the strata plan for the
serviced apartments. It subsequently discovered defects in the
common property which had to be fixed. Because these defects had
not caused any damage to a person or to property, the Owners'
Corporation's loss was limited to the cost of the remedial
works. This loss is an example of "pure economic loss"
which may be broadly described as loss which is unconnected with
any physical damage.
The principal question raised was whether the builder owed the
Owners' Corporation a duty to exercise reasonable care in the
construction of the building to avoid causing the Corporation to
suffer purely economic loss resulting from latent defects in the
Vulnerability to lack of care
Vulnerability has been traditionally recognised as the key
touchstone for a finding of negligence for purely economic loss. In
a slight deviation from past approaches, the Court gave little
attention to this concept. It emphasised that provided the contract
governs the quality of work to be provided, investors will not be
found to be vulnerable to lack of care by the builder in the
performance of its contractual obligations.
Responsibility for loss
An additional issue the Court addressed was whether the builder
had any responsibility in relation to the loss flowing from latent
defects extending beyond the confines of its contractual
obligations owed to the developer as counterparty to the contract.
The Court found that while the builder may owe a duty of care to
the original owners of the development, it did not owe an
equivalent duty to the Owners' Corporation – the
Owners' Corporation is not a proxy for the lot owners and was
not in existence at the time of execution of the contracts.
Buyer beware approach
The Court emphasised that each purchaser was free to negotiate
and seek extensive warranties from the vendor and could have walked
away if dissatisfied.
Domestic statutory regimes are in place to protect consumers who
may not be sufficiently astute to protect their own interests.
However, it is not the court's role to extend this protection
to investors and circumvent the deliberate policy choice of
The essential message to be drawn from this decision is that in
the commercial property sphere, investors will have to be diligent
in protecting their interests. The consequences of a failure to
exercise such diligence will not be able to be sheeted home to
builders through negligence claims.
Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
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